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Social Security Privatization with Elastic Labor Supply and Second-Best Taxes

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Author Info
Kent Smetters (The Wharton School, University of Pennsylvania)

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Abstract

This paper shows that many common methods of privatizing social security fail to reduce labor market distortions when taxes are second best, challenging a key reason to privatize. Ironically, providing “transition relief” to workers alive at the time of the reform, in an effort to protect their previous contributions, undercuts potential efficiency gains. Chile’s reform -- the first major privatization that also served as a model for subsequent countries -- actually increased distortions. It is then shown that privatization with limited transition relief can reduce labor market distortions and produce gains to current and future generations without hurting initial retirees, i.e., a Pareto gain even with second-best taxes.

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Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp092.

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Length: 26 pages
Date of creation: Jan 2005
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Handle: RePEc:mrr:papers:wp092

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  1. Feldstein, Martin, 1996. "The Missing Piece in Policy Analysis: Social Security Reform," American Economic Review, American Economic Association, vol. 86(2), pages 1-14, May.
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  2. Henning Bohn, 2004. "Intergenerational Risk Sharing and Fiscal Policy," 2004 Meeting Papers 22, Society for Economic Dynamics. [Downloadable!]
  3. Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, vol. 8(3), pages 275-298, December. [Downloadable!] (restricted)
  4. Brunner, Johann K., 1996. "Transition from a pay-as-you-go to a fully funded pension system: The case of differing individuals and intragenerational fairness," Journal of Public Economics, Elsevier, vol. 60(1), pages 131-146, April. [Downloadable!] (restricted)
  5. Breyer, Friedrich & Straub, Martin, 1993. "Welfare effects of unfunded pension systems when labor supply is endogenous," Journal of Public Economics, Elsevier, vol. 50(1), pages 77-91, January. [Downloadable!] (restricted)
  6. Abel, Andrew B, et al, 1989. "Assessing Dynamic Efficiency: Theory and Evidence," Review of Economic Studies, Blackwell Publishing, vol. 56(1), pages 1-19, January. [Downloadable!] (restricted)
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  7. Martin Feldstein, 1995. "Would Privatizing Social Security Raise Economic Welfare?," NBER Working Papers 5281, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  8. Martin Feldstein & Andrew Samwick, 1992. "Social Security Rules and Marginal Tax Rates," NBER Working Papers 3962, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  9. Laitner, John, 2000. " Social Security Reform and National Wealth," Scandinavian Journal of Economics, Blackwell Publishing, vol. 102(3), pages 349-71, June. [Downloadable!] (restricted)
  10. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier. [Downloadable!] (restricted)
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  11. Robert J. Shiller, 1998. "Social Security and Institutions for Intergenerational, Intragenerational and International Risk Sharing," Cowles Foundation Discussion Papers 1185, Cowles Foundation, Yale University. [Downloadable!]
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  12. Peter Diamond & John Geanakoplos, 2003. "Social Security Investment in Equities," American Economic Review, American Economic Association, vol. 93(4), pages 1047-1074, September. [Downloadable!]
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  13. Diamond, Peter A, 1996. "Proposals to Restructure Social Security," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 67-88, Summer. [Downloadable!] (restricted)
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