The Welfare Implications of Social Security for Homeowners

Abstract

For most households in the U.S., the largest proportion of net worth is owner-occupied housing. We show that incorporating frictions associated with housing market into the life cycle framework generates a long-run welfare gain of eliminating social security almost twice as much as in a standard life-cycle economy. The key reason for this difference is that as mandatory savings for future retirement, social security is a worse substitute for household savings when a sizable fraction of household assets is held for immediate consumption of housing durable services.