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The Distributional Effects of an Investment-Based Social Security System

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  • Martin Feldstein
  • Jeffrey B Liebman

Abstract

In this paper we study the distributional impact of a change from the existing pay-as-you-go Social Security system to one that combines both pay-as-you-go and investment-based elements. Such a transition can avert the large tax increases that would otherwise be necessary to maintain the level of benefits promised under current law as life expectancy increases. According to the Social Security actuaries (Board of Trustees, 1999), retaining the existing pay-as-you-go system would eventually require raising the current 12.4 percent Social Security payroll tax rate to about 19 percent to maintain the current benefit rules or cutting benefits by more than one-third in order to avoid a tax increase. In contrast, previous research showed that adding an investment-based component with savings equal to two percent of covered earnings to the existing 12.4 percent pay-as-you-go system would be sufficient to maintain the benefits promised under current rules without any increase in tax rates (Feldstein and Samwick 1997, 1998a, 1998b).

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Bibliographic Info

Paper provided by Center for Economic Studies, U.S. Census Bureau in its series Working Papers with number 02-08.

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Date of creation: Apr 2002
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Handle: RePEc:cen:wpaper:02-08

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Keywords: CES; economic; research; micro; data; microdata; chief; economist;

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  1. Michael J. Boskin & Laurence J. Kotlikoff & Douglas J. Puffert & John B. Shoven, 1987. "Social Security: A Financial Appraisal Across and Within Generations," NBER Working Papers 1891, National Bureau of Economic Research, Inc.
  2. Julia Lynn Coronado & Don Fullerton & Thomas Glass, 2000. "The Progressivity of Social Security," NBER Working Papers 7520, National Bureau of Economic Research, Inc.
  3. Michael D. Hurd & John B. Shoven, 1985. "The Distributional Impact of Social Security," NBER Chapters, in: Pensions, Labor, and Individual Choice, pages 193-222 National Bureau of Economic Research, Inc.
  4. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
  5. Judith Chevalier & Glenn Ellison, 1998. "Career Concerns of Mutual Fund Managers," NBER Working Papers 6394, National Bureau of Economic Research, Inc.
  6. Alan L. Gustman & Thomas L. Steinmeier, 2000. "Social Security Benefits of Immigrants and U.S. Born," NBER Chapters, in: Issues in the Economics of Immigration, pages 309-350 National Bureau of Economic Research, Inc.
  7. Fred T. Goldberg, Jr. & Michael J. Graetz, 1999. "Reforming Social Security: A Practical and Workable System of Personal Retirement Accounts," NBER Working Papers 6970, National Bureau of Economic Research, Inc.
  8. Lee, Ronald & Tuljapurkar, Shripad, 1998. "Uncertain Demographic Futures and Social Security Finances," American Economic Review, American Economic Association, vol. 88(2), pages 237-41, May.
  9. Douglas W. Elmendorf & Jeffrey B. Liebman, 2000. "Social Security Reform and National Saving in an Era of Budget Surpluses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 1-72.
  10. Martin Feldstein & Andrew Samwick, 1997. "The Economics of Prefunding Social Security and Medicare Benefits," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 115-164 National Bureau of Economic Research, Inc.
  11. James M. Poterba, 1999. "The Rate of Return to Corporate Capital and Factor Shares: New EstimatesUsing Revised National Income Accounts and Capital Stock Data," NBER Working Papers 6263, National Bureau of Economic Research, Inc.
  12. Martin Feldstein & Elena Ranguelova, 1998. "Individual Risk and Intergenerational Risk Sharing in an Investment-Based Social Security Program," NBER Working Papers 6839, National Bureau of Economic Research, Inc.
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