Opting Out of Social Security and Adverse Selection
AbstractThis paper compares two general methods of privatization social security: forced participation in the new privatized system vs. letting people choose between the new system or staying in social security (i.e., opting out). Simulations are performed using a large scale perfect-foresight OLG simulation model that incorporates both intra-generational and inter-generational heterogeneity. The decision of any agent to opt out is endogenous and depends on the opting out decisions of all other agents vis-…-vis factor prices. Various tax bases are considered in financing the transition path, as well as the perceived tax-benefit linkage due to the informational problems inherent in many social security systems. We consider two cases: full and no perception Both methods of privatizing social security lead to large long- run gains for all lifetime income classes despite the intra-generational progressivity of social security, but differ in their short run effects due to adverse selection associated with opting out. Adverse selection is a key reason why many economists oppose opting out and why many plans to privatize social security systems mandate participation. This paper, however, shows this wisdom to be wide of the mark. Opting out is better at protecting the welfare of the initial elderly, even though forced participation protects their real value of social security benefits because opting out continues to collect payroll tax revenue from those who stay with social security. Opting out can mean quicker transition paths by reducing social security wealth faster than forced participation, because many will forfeit their accrued claims as the price of opting out. Yet opting out, along with a decrease in the payroll tax rate is better at shifting the burden to future workers who benefit from privatization.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 6430.
Date of creation: Feb 1998
Date of revision:
Contact details of provider:
Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.
Web page: http://www.nber.org
More information through EDIRC
Find related papers by JEL classification:
- H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Laurence J. Kotlikoff, 1996.
"Privatization of Social Security: How It Works and Why It Matters,"
in: Tax Policy and the Economy, Volume 10, pages 1-32
National Bureau of Economic Research, Inc.
- Laurence J. Kotlikoff, 1995. "Privatization of Social Security: How It Works and Why It Matters," NBER Working Papers 5330, National Bureau of Economic Research, Inc.
- Laurence J. Kotlikoff, 1995. "Privatization of Social Security: How it Works and Why it Matters," Boston University - Institute for Economic Development 66, Boston University, Institute for Economic Development.
- Alan L. Gustman & Thomas L. Steinmeier, 1998.
"Privatizing Social Security: First-Round Effects of a Generic, Voluntary, Privatized U.S. Social Security System,"
in: Privatizing Social Security, pages 313-361
National Bureau of Economic Research, Inc.
- Alan L. Gustman & Thomas L. Steinmeier, 1995. "Privatizing Social Security: First Round Effects of a Generic, VoluntaryPrivatized U.S. Social Security System," NBER Working Papers 5362, National Bureau of Economic Research, Inc.
- Susanne Pech, 2002.
"Tax incentives for private life annuities and the social security reform: Effects on consumption and on adverse selection,"
Economics working papers
2002-09, Department of Economics, Johannes Kepler University Linz, Austria.
- Susanne Pech, 2004. "Tax Incentives for Private Life Annuities and the Social Security Reform: Effects on Consumption and on Adverse Selection," FinanzArchiv: Public Finance Analysis, Mohr Siebeck, Tübingen, vol. 60(4), pages 556-, December.
- Remzi Kaygusuz, 2007.
"Social Security and Two-Earner Households,"
2007 Meeting Papers
677, Society for Economic Dynamics.
- Vincent Touzé, 2010.
"Le système de retraite américain : impact de la crise et tendances de long terme,"
Documents de Travail de l'OFCE
2010-27, Observatoire Francais des Conjonctures Economiques (OFCE).
- Vincent Touze, 2010. "Le système de retraite américain : impact de la crise et tendances de long terme," Sciences Po publications 2010-27, Sciences Po.
- Alan L. Gustman & Thomas L. Steinmeier, 2002.
"The New Social Security Commission Personal Accounts: Where is the Investment Principal?,"
wp031, University of Michigan, Michigan Retirement Research Center.
- Alan L. Gustman & Thomas L. Steinmeier, 2002. "The New Social Security Commission Personal Accounts: Where Is the Investment Principal?," NBER Working Papers 9045, National Bureau of Economic Research, Inc.
- Robert Fenge & Jakob Weizsäcker, 2001. "Compulsory Savings: Efficiency and Redistribution On the Interaction of Means Tested Basic Income and Public Pensions," International Tax and Public Finance, Springer, vol. 8(4), pages 637-652, August.
- Richard Disney & Robert Palacios & Edward Whitehouse, 1999. "Individual choice of pension arrangement as a pension reform strategy," IFS Working Papers W99/18, Institute for Fiscal Studies.
- repec:spo:wpecon:info:hdl:2441/eu4vqp9ompqllr09hai2o91j4 is not listed on IDEAS
- repec:spo:wpecon:info:hdl:2441/5l6uh8ogmqildh09h8492c58l is not listed on IDEAS
- Cerda, Rodrigo A., 2008. "The Chilean pension reform: A model to follow?," Journal of Policy Modeling, Elsevier, vol. 30(3), pages 541-558.
- Disney, Richard & Whitehouse, Edward, 1992. "The personal pensions stampede," MPRA Paper 10476, University Library of Munich, Germany.
- Robert Fenge & Jakob von Weizsäcker, 1999. "To what Extent are Public Pensions Pareto-improving? On the Interaction of Means Tested Basic Income and Public Pensions," CESifo Working Paper Series 197, CESifo Group Munich.
- Anja Deelen, 2005. "Adverse selection in disability insurance; empirical evidence for Dutch firms," CPB Discussion Paper 46, CPB Netherlands Bureau for Economic Policy Analysis.
- Johanna Vásquez Velásquez & Karoll Gómez Portilla, 2004. "Selección adversa en el régimen contributivo de salud: el caso de la EPS de Susalud," BORRADORES DEL CIE 003489, UNIVERSIDAD DE ANTIOQUIA - CIE.
- Catherine Mathieu & Vincent Touze & Henri Sterdyniak & Gerard Cornilleau, 2010.
"Les réformes des retraites en Europe dans la crise,"
Sciences Po publications
2010-17, Sciences Po.
- Gérard Cornilleau & Catherine Mathieu & Henri Sterdyniak & Vincent Touzé, 2010. "Les réformes des retraites en Europe dans la crise," Documents de Travail de l'OFCE 2010-17, Observatoire Francais des Conjonctures Economiques (OFCE).
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ().
If references are entirely missing, you can add them using this form.