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

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  • Kent Smetters

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 other countries -- actually increased labor market 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 National Bureau of Economic Research, Inc in its series NBER Working Papers with number 11101.

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Date of creation: Feb 2005
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Handle: RePEc:nbr:nberwo:11101

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  1. Brunner, Johann K., 1993. "Transition from a pay-as-you-go to a fully-funded pension system: The case of differing individuals and intragenerational fairness," Discussion Papers, Series 1 266, University of Konstanz, Department of Economics.
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  7. Martin Feldstein & Jeffrey B. Liebman, 2001. "Social Security," NBER Working Papers 8451, National Bureau of Economic Research, Inc.
    • 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.
  8. Henning Bohn, 2004. "Intergenerational Risk Sharing and Fiscal Policy," 2004 Meeting Papers 22, Society for Economic Dynamics.
  9. Peter A. Diamond, 1996. "Proposals to Restructure Social Security," Journal of Economic Perspectives, American Economic Association, vol. 10(3), pages 67-88, Summer.
  10. Andrew Abel & Gregory N. Mankiw & Lawrence H. Summers & Richard Zeckhauser, . "Assessing Dynamic Efficiency: Theory and Evidence," Rodney L. White Center for Financial Research Working Papers 14-88, Wharton School Rodney L. White Center for Financial Research.
  11. Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, vol. 8(3), pages 275-298, December.
  12. Martin Feldstein, 1995. "Would Privatizing Social Security Raise Economic Welfare?," NBER Working Papers 5281, National Bureau of Economic Research, Inc.
  13. Laitner, John, 2000. " Social Security Reform and National Wealth," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 349-71, June.
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Cited by:
  1. Robert Holzmann & Richard Hinz, 2005. "Old Age Income Support in the 21st century: An International Perspective on Pension Systems and Reform," World Bank Publications, The World Bank, number 7336, October.

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