Welfare Implications of Net Social Security Wealth

Real net social security wealth (NSSW), the real present value of social security benefits received minus social security taxes paid, is frequently used as a direct proxy measure for the impact of a social security system on generation welfare. This article examines the relationship between real NSSW and generation welfare in a 3-period lived overlapping generations economy. It demonstrates that NSSW can be a very poor proxy for the effects of a social security system on generation welfare. For example, NSSW can actually be negatively correlated with welfare for every generation due to price distortion effects. Annotated pointers to related work can be accessed here: http://www.econ.iastate.edu/tesfatsi/dehome.htm