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Two Computations To Fund Social Security


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We use a general equilibrium model to study the impact offully funding social security on the distribution of consumptionacross cohorts and over time. In an initial stationary equilibriumwith an unfunded social security system, the capital/output ratio,debt/output ratio, and rate of return to capital are 3.2, 0.6, and6.8%, respectively. In our first experiment, we suddenly terminatesocial security payments but compensate entitled generations by amassive one-time increase in government debt. Eventually, theaggregate physical capital stock rises by 40%, the return on capitalfalls to 4.4%, and the labor income tax rate falls from 33.9 to14%. We estimate the size of the entitlement debt to be 2.7 timesreal GDP, which is paid off by levying a 38% labor income tax rateduring the first 40 years of the transition. In our secondexperiment, we leave social security benefits untouched but force thegovernment temporarily to increase the tax on labor income so asgradually to accumulate private physical capital, from the proceedsof which it eventually finances social security payments. Thisparticular government-run funding scheme delivers larger efficiencygains (in both the exogenous and endogenous price cases) thanprivatization, an outcome stemming from the scheme s public provisionof insurance both against life-span risk and labor income volatility.

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Bibliographic Info

Article provided by Cambridge University Press in its journal Macroeconomic Dynamics.

Volume (Year): 1 (1997)
Issue (Month): 01 (January)
Pages: 7-44

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Handle: RePEc:cup:macdyn:v:1:y:1997:i:01:p:7-44_00

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