Wharton Finance Faculty Research
Relaxing Household Liquidity Constraints through Social Security
Sylvain Catherine, Max Miller, Natasha Sarin
Wharton working paper
- Most U.S. households do not have enough liquid savings to deal with an unexpected emergency, let alone the large-scale turmoil created by COVID-19.
- This paper analyzes the idea of allowing workers to tap into 1% of their Social Security wealth, to help cover current expenses during the COVID-19 crisis. This would provide over $2,000 to the large majority of working age (20-61 year-old) individuals, with only a minor decrease in future Social Security benefits.
- Under normal circumstances, unemployment benefits alone only enable workers to recover, on average, 50% of lost wages. This means that over 80% of workers in the bottom three deciles of marketable wealth will be unable to meet their current expenses after just three months of unemployment.
- Under this Social Security proposal, workers in the bottom quartile of marketable wealth would be able to cover their current expenses for an additional 88 days, on average. This is superior to other government measures that already have been enacted to support workers, like penalty-free access to retirement accounts (which does nothing for the most vulnerable workers with no retirement account wealth) and $1,200 stimulus checks issued by Congress.
- Although the provision for supplementing unemployment benefits by an extra $600 per week, which will continue through July 2020, extends the liquidity of workers in the bottom quartile by an additional 110 days, on average, it does so at a tremendous fiscal cost, and may well create distortionary labor effects. Drawing on 2% of Social Security wealth could yield a similar result while avoiding those pitfalls.
- Borrowing from Social Security also would shield individuals from having to take out private loans at exorbitant interest rates. Instead, workers could finance current consumption by taking a loan from themselves, via Social Security wealth, at a near-zero interest rate.
- The consequences on retirement savings of a one-time decrease in future benefits would be minimal. A distribution of 1% of Social Security wealth can be offset by delaying future Social Security benefit claims by just six weeks.
- This paper provides a quantitative evaluation of the potential of a Social Security approach that can be adapted by policymakers to consider this and other options to support households. The significant political risks—e.g., a hastening of the depletion of the Social Security trust fund, concerns about a slippery slope that could reduce retirement wealth—are important and beyond the scope of this analysis.