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Social Security Privatization with Income-Mortality Correlation

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

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Abstract

While privatizing Social Security can improve labor supply incentives, it can also reduce risk sharing. We simulate a 50-percent 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 $30,100 of extra resources for each future household after all transitional losses have been paid. When wages are not insurable, privatization reduces efficiency by about $8,100 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 harm.

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Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp140.

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Length: 43 pages
Date of creation: Nov 2006
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Handle: RePEc:mrr:papers:wp140

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  1. 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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  2. Shinichi Nishiyama, 2004. "Analyzing an Aging Population," 2004 Meeting Papers 175, Society for Economic Dynamics. [Downloadable!]
  3. 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.
  4. Shinichi Nishiyama & Kent Smetters, 2005. "Does Social Security Privatization Produce Efficiency Gains?," NBER Working Papers 11622, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  5. Thomas Sargent & He Huang & Selo Imrohoroglu, . "Two Computational Experiments to Fund Social Security," Papers _002, Stanford University, Hoover Institution. [Downloadable!]
  6. 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)
  7. Jeffrey R. Brown, 2000. "Differential Mortality and the Value of Individual Account Retirement Annuities," NBER Working Papers 7560, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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  8. 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)
  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. Laurence J. Kotlikoff & Kent A. Smetters & Jan Walliser, 1998. "Social Security: Privatization and Progressivity," NBER Working Papers 6428, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
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