Federal Reserve Board of Governors†

This paper quantitatively assesses the consequences of the U.S. Social Security pro-gram during a business cycle episode comprised of large losses to wealth and increases in unemployment such as the Great Recession. We find that Social Security mitigates the average welfare losses for agents living at the time of the shock by 1.6 % of future expected lifetime consumption. Social Security reduces the welfare losses since, unlike private wealth which the shock causes to depreciate, Social Security benefits are unaf-fected. We find that Social Security is particularly effective at mitigating welfare losses for agents who are older at the time of the shock and who experience lower lifetime incomes. Social security is more effective for the agents who are older at the time of the shock because they have less time before retirement to increase their labor supply and therefore must absorb more of the depreciation in wealth through a reduction in their consumption. Moreover, Social Security is relatively more effective at mitigating losses for lower income agents because these benefits represent a larger share of their post-retirement consumption. Importantly, we find that Social Security mitigates wel-fare losses for these vulnerable groups during this business cycle episode mainly by lowering welfare in the steady state as opposed to exacerbating welfare losses for other living agents