Home Production and Social Security Reform

As such, the model differentiates both consumption goods and labor effort according to their respective roles in home production and market activities. Using a calibrated model, the authors find that eliminating the current pay-as-you-go Social Security system has important implications for both labor supply and consumption decisions and that these decisions are influenced by the presence of a home production technology. Comparing their benchmark economy to one with differentiated goods but no home production, the authors find that eliminating Social Security benefits generates larger welfare gains in the presence of home production. This result is due to the self insurance aspects generated by the presence of home production. Comparing their economy to a one-good economy without home production, the authors show that the welfare gains of eliminating Social Security are magnified even further. These policy analyses suggest the importance of modeling home production and distinguishing between both time use and consumption goods depending on whether they are involved in market or home production.