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Should Social Security Be Means Tested?

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  • Martin Feldstein

Abstract

The provision of social security benefits to retirees distorts the saving decisions of workers who are rational enough to save for their future. Since the implicit rate of return in an unfunded social security program is less than the marginal product of capital, the resulting decline in saving causes a welfare loss. It has been suggested that this welfare loss could be reduced, while still protecting those who lack the foresight to save for their retirement (the"myopes" and "partial myopes" of the paper), by replacing the current universal social security program with a means-tested program that pays benefits only to the "myopic" individuals who have little or no other retirement income or assets.The present paper evaluates this suggestion with the help of an explicit steady-state welfare comparison of the optimal universal and optimal means-tested programs. The relative welfare levels depend on characteristics of the economy (the growth rates of population and real wages and the productivity of capital) and of the population (the frequency and degree of myopia with respect to saving for retirement).The analysis shows that, although a means tested program is generally superior, it does not always dominate the best alternative universal program.A universal program can be preferable under conditions which imply that the optimal means-tested program would induce rational savers to stop saving. The analysis also implies that overall welfare can be increased by using different social security programs for different groups of workers if the working population as a whole can be divided into two or more subgroups with different mixes of myopes, partial myopes and rational life-cycle savers.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 1775.

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Date of creation: Dec 1985
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Publication status: published as Journal of Political Economy, Vol. 95, No. 3, pp. 468-484, (June 1987).
Handle: RePEc:nbr:nberwo:1775

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References

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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.
  2. Laurence J. Kotlikoff & Lawrence H. Summers, 1981. "The Adequacy of Savings," NBER Working Papers 0627, National Bureau of Economic Research, Inc.
  3. Barro, Robert J, 1974. "Are Government Bonds Net Wealth?," Journal of Political Economy, University of Chicago Press, vol. 82(6), pages 1095-1117, Nov.-Dec..
  4. Danziger, Sheldon & Haveman, Robert & Plotnick, Robert, 1981. "How Income Transfer Programs Affect Work, Savings, and the Income Distribution: A Critical Review," Journal of Economic Literature, American Economic Association, vol. 19(3), pages 975-1028, September.
  5. Martin Feldstein & James M. Poterba & Louis Dicks-Mireaux, 1981. "The Effective Tax Rate and the Pretax Rate of Return," NBER Working Papers 0740, National Bureau of Economic Research, Inc.
  6. R. Glenn Hubbard, 1984. "'Precautionary' Saving Revisited: Social Security, Individual Welfare, and the Capital Stock," NBER Working Papers 1430, National Bureau of Economic Research, Inc.
  7. Feldstein, Martin S, 1982. "Social Security and Private Saving: Reply," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 630-42, June.
  8. Feldstein, Martin S, 1985. "The Optimal Level of Social Security Benefits," The Quarterly Journal of Economics, MIT Press, vol. 100(2), pages 303-20, May.
  9. Martin Feldstein, 1982. "The Welfare Cost of Social Security's Impact on Private Saving," NBER Working Papers 0969, National Bureau of Economic Research, Inc.
  10. Alan L. Gustman & Thomas L. Steinmeier, 1983. "Social Security Reform and Labor Supply," NBER Working Papers 1212, National Bureau of Economic Research, Inc.
  11. Feldstein, Martin S, 1974. "Social Security, Induced Retirement, and Aggregate Capital Accumulation," Journal of Political Economy, University of Chicago Press, vol. 82(5), pages 905-26, Sept./Oct.
  12. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
  13. Sheshinski, Eytan & Weiss, Yoram, 1981. "Uncertainty and Optimal Social Security Systems," The Quarterly Journal of Economics, MIT Press, vol. 96(2), pages 189-206, May.
  14. Andrew B. Abel, 1986. "Bequests and Social Security With Uncertain Lifetimes," NBER Working Papers 1372, National Bureau of Economic Research, Inc.
  15. Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
  16. Leimer, Dean R & Lesnoy, Selig D, 1982. "Social Security and Private Saving: New Time-Series Evidence," Journal of Political Economy, University of Chicago Press, vol. 90(3), pages 606-29, June.
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Cited by:
  1. Mikhail Golosov & Aleh Tsyvinski, 2005. "Designing Optimal Disability Insurance: A Case for Asset Testing," Levine's Bibliography 784828000000000450, UCLA Department of Economics.
  2. Martin Feldstein, 1996. "The Missing Piece in Policy Analysis: Social Security Reform," NBER Working Papers 5413, National Bureau of Economic Research, Inc.
  3. Xavier Sala-i-Martin, 1992. "Transfers," NBER Working Papers 4186, National Bureau of Economic Research, Inc.

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