The Optimal Level of Social Security Benefits

Abstract

The optimal level of social security benefits depends on balancing the protection that these benefits offer to those who lack the foresight to provide for their own old age against the welfare costs of distorting economic behavior. The primary such cost is the distortion in private saving. The present paper derives the level of social security benefits that is optimal in three basic cases. In the first section the paper derives the optimal level of benefits for an economy in which all individuals do not anticipate retirement at all and therefore do no saving. The second and third sections then derive optimal benefits for two different definitions of incomplete myopia.