We quantify the importance of idiosyncratic health risk in a calibrated general equilibrium model of Social Security. We construct an overlapping generations model with rational-expectations households, idiosyncratic labor income and health risk, profit-maximizing firms, incomplete insurance markets, and a government that provides pensions and health insurance. We calibrate this model to the US economy and perform two computational experiments: $\left (i\right)$ cutting Social Security’s payroll tax, and $\left (ii\right)$ modifying Social Security’s benefit-earnings rule. Our findings suggest that health risk amplifies the welfare implications of both experiments: downsizing Social Security always leads to higher overall welfare, but the welfare gain is larger when we account for health risk, and increasing the progressivity of Social Security’s benefit-earnings rule has a larger positive effect on welfare in the presence of health risk. We also find that allowing households additional tools to self-insure against health risk weakens the precautionary motive, so our experiments have similar welfare implications both with and without health risk.

In this paper, I analyze an optimal loan contract between a risk-neutral financial intermediary and a risk-averse household, where the household receives a stochastic endowment stream that grows over time and is unable to commit to the contract. I examine the household's welfare in the equilibrium contract, and find that, first, under sufficiently rapid endowment growth, the presence of uncertainty in endowment may improve the household's welfare through relaxation of its commitment problem, and second, regardless of the endowment growth rate, the household's welfare is nonincreasing in the persistence of endowment. Numerical analysis suggests that welfare improvement from uncertainty may occur under reasonable parameters. These results have potentially important practical implications—for example, for developing countries that rely on external borrowing.