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OutSMarTing the Social Security Crisis
T. Scott Findley
Illinois State University, Department of Economics
Frank Caliendo
Utah State University, Department of Economics
We present a rule-of-thumb consumption model with participation in a ``Save More TomorrowTM'' (SMarT) plan, and we analytically derive the fraction of life-cycle wage increases that must be saved to offset a reduction in social security benefits resulting from an aging population (holding taxes fixed and maintaining a balanced social security budget). We find that this ``critical'' SMarT rate is quite low, and much lower than the rate that participants actually used in real-world pilot implementations. This finding generally continues to hold even if wage growth is slow, even if the real return on private saving is low or extremely volatile, and even if enrollment in a SMarT plan is delayed until late in the life cycle. Moreover, we show that participation in a SMarT plan can improve lifetime utility.
Key Words: Save More TomorrowTM • Social Security • Rule-of-Thumb Consumption
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Public Finance Review, Vol. 35, No. 6,
647-668 (2007)
DOI: 10.1177/1091142107301755
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