SOCIAL-SECURITY, LONGEVITY, AND MORAL HAZARD

Recently, several authors have argued that social security can have positive effects on savings and welfare when individuals possess hidden information about their longevity, that is when there is adverse selection in annuity markets. This paper considers the related problem of the effects of social security when individuals can take hidden actions to affect their longevity, that is when there is moral hazard in annuity markets. In contrast to the adverse-selection models, we show that social security never raises welfare in a pure moral hazard economy. As well, social security may either increase or reduce longevity, depending on the characteristics of the health-related goods consumed. It is suggested that a complete analysis of social security needs to consider both adverse selection and moral hazard.