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Does Social Security Privatization Produce Efficiency Gains?

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Author Info
Shinichi Nishiyama (Georgia State University)
Kent Smetters (The Wharton School, University of Pennsylvania)

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Abstract

While privatizing social security can improve labor supply incentives, it can also reduce risk sharing. We analyze a 50% privatization using an overlapping-generations model where heterogeneous agents with elastic labor supply face idiosyncratic earnings shocks and longevity uncertainty. When wage shocks are insurable, privatization produces about $18,100 of extra resources for each future household after all transitional losses have been compensated for with lump-sum taxes. When wages are not insurable, privatization reduces efficiency by about $2,400 per future household. We check the robustness of these results to different model specifications as well as policy reforms and arrive at several surprising conclusions. First, privatization performs better in a closed economy, where interest rates decline with capital accumulation, than in an open economy. Second, privatization also performs better when an actuarially fair private annuity market does not exist. Third, government matching of private contributions on a progressive basis is not very effective at restoring efficiency and can actually cause harm. (c) 2007 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

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Publisher Info
Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 122 (2007)
Issue (Month): 4 (November)
Pages: 1677-1719
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Handle: RePEc:tpr:qjecon:v:122:y:2007:i:4:p:1677-1719

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References listed on IDEAS
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
  1. Shinichi Nishiyama & Kent Smetters, 2005. "Consumption Taxes and Economic Efficiency with Idiosyncratic Wage Shocks," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1088-1115, October.
  2. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March. [Downloadable!]
  3. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October. [Downloadable!] (restricted)
  4. Gustman, Alan L. & Steinmeier, Thomas L., 2001. "How effective is redistribution under the social security benefit formula?," Journal of Public Economics, Elsevier, vol. 82(1), pages 1-28, October. [Downloadable!] (restricted)
  5. Murphy, Kevin M & Welch, Finis, 1998. "Perspectives on the Social Security Crisis and Proposed Solutions," American Economic Review, American Economic Association, vol. 88(2), pages 142-50, May. [Downloadable!] (restricted)
  6. Shinichi Nishiyama, 2004. "Analyzing an Aging Population---A Dynamic General Equilibrium Approach---," CIRJE F-Series CIRJE-F-266, CIRJE, Faculty of Economics, University of Tokyo. [Downloadable!]
  7. Mariacristina De Nardi & Selahattin Imrohoglu & Thomas J. Sargent, 1998. "Projected U.S. demographics and social security," Working Paper Series WP-98-14, Federal Reserve Bank of Chicago. [Downloadable!]
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  8. Martin Feldstein, 1995. "Would Privatizing Social Security Raise Economic Welfare?," NBER Working Papers 5281, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Martin Floden & Jesper Lindé, 2001. "Idiosyncratic Risk in the United States and Sweden: Is There a Role for Government Insurance?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 406-437, July. [Downloadable!] (restricted)
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  10. David Altig et al., 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June. [Downloadable!] (restricted)
  11. Dr. Peter Kenning & Hilke Plassmann, 2004. "NeuroEconomics," Experimental 0412005, EconWPA. [Downloadable!]
  12. Shinichi Nishiyama, 2002. "Bequests, Inter Vivos Transfers, and Wealth Distribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(4), pages 892-931, October. [Downloadable!] (restricted)
  13. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer, vol. 6(1), pages 83-114, June.
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(explanations, Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.)

  1. Mark Huggett (Georgetown University) and Juan Carlos Parra (Georgetown University), . "Quantifying the Inefficiency of the US Social Insurance System," Working Papers gueconwpa~05-05-16, Georgetown University, Department of Economics. [Downloadable!]
    Other versions:
  2. Mark Huggett & Juan Carols Parra, . "How Well Does the US Social Insurance System Provide Social Insurance?," Working Papers gueconwpa~06-06-11, Georgetown University, Department of Economics. [Downloadable!]
  3. Shinichi Nishiyama & Kent Smetters, 2008. "The Optimal Design of Social Security Benefits," Working Papers wp197, University of Michigan, Michigan Retirement Research Center. [Downloadable!]
  4. J. C. Parra & M. Huggett, 2005. "Quantifying the Inefficiency of the US Social Security System," Computing in Economics and Finance 2005 70, Society for Computational Economics. [Downloadable!]
  5. Shinichi Nishiyama & Kent Smetters, 2006. "Social Security Privatization with Income-Mortality Correlation," Working Papers wp140, University of Michigan, Michigan Retirement Research Center. [Downloadable!]
  6. Brasil Gondim, João Luis & Casamatta, Georges, 2008. "Voting on Parametric Reforms of the Pay-As-You-Go Pension System," CEPR Discussion Papers 6993, C.E.P.R. Discussion Papers. [Downloadable!] (restricted)
  7. Hans Fehr & Christian Habermann & Fabian Kindermann, 2008. "Social Security with Rational and Hyperbolic Consumers," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 11(4), pages 884-903, October. [Downloadable!] (restricted)
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