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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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number
1775.
Length: Date of creation: Feb 1989 Date of revision: Handle: RePEc:nbr:nberwo:1775
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Martin Feldstein & Jeffrey B. Liebman, 2001.
"Social Security,"
NBER Working Papers
8451, National Bureau of Economic Research, Inc.
[Downloadable!] (restricted)
Other versions:
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.
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Kotlikoff, Laurence J & Spivak, Avia & Summers, Lawrence H, 1982.
"The Adequacy of Savings,"
American Economic Review,
American Economic Association, vol. 72(5), pages 1056-69, December.
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Laurence J. Kotlikoff & Lawrence H. Summers, 1981.
"The Adequacy of Savings,"
NBER Working Papers
0627, National Bureau of Economic Research, Inc.
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