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The Transition to Investment-Based Social Security when Portfolio Returns and Capital Profitability are Uncertain

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  • Martin Feldstein
  • Elena Ranguelova
  • Andrew Samwick

Abstract

In this paper we study the transition from a pay-as-you-go system of Social Security pensions to an investment-based system in an economy in which portfolio returns and capital profitability are both uncertain. The paper extends earlier studies by Feldstein and Samwick that modeled the transition process in a nonstochastic environment and by Feldstein and Ranguelova that examined the implication of portfolio risk after the transition to an investment-based system has been completed. We analyze transitions to a mixed system that maintains the current 12.4 percent pay-as-you-go tax rate as well as to a system that is completely investment-based. We model intergenerational guarantees and assess the risk of such guarantees to taxpayers. We find that transitions to either a completely investment-based system or a mixed system that maintains current law benefits can be done with little additional saving in the early years (a maximum of three percent) and substantially lower combinations of taxes and saving deposits in the later years. The extra risk to retirees and/or taxpayers is relatively small, making the investment-based plans preferable to a pure pay-as-you-go system for reasonable degrees of risk aversion.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7016.

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Date of creation: Mar 1999
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Publication status: published as Risk Aspects of Investment Based Social Security Reform, Campbell, John and Martin Feldstein, eds., Chicago: University of Chicago Press, 1999,forthcoming.
Handle: RePEc:nbr:nberwo:7016

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  1. Martin Feldstein & Andrew Samwick, 1997. "The Economics of Prefunding Social Security and Medicare Benefits," NBER Chapters, National Bureau of Economic Research, Inc, in: NBER Macroeconomics Annual 1997, Volume 12, pages 115-164 National Bureau of Economic Research, Inc.
  2. Poterba, James M., 1998. "The rate of return to corporate capital and factor shares: new estimates using revised national income accounts and capital stock data," Carnegie-Rochester Conference Series on Public Policy, Elsevier, Elsevier, vol. 48(1), pages 211-246, June.
  3. Martin Feldstein & Elena Ranguelova, 1998. "Individual Risk and Intergenerational Risk Sharing in an Investment-Based Social Security Program," NBER Working Papers 6839, National Bureau of Economic Research, Inc.
  4. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, Elsevier, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  5. Michael J. Boskin & Laurence J. Kotlikoff & Douglas J. Puffert & John B. Shoven, 1987. "Social Security: A Financial Appraisal Across and Within Generations," NBER Working Papers 1891, National Bureau of Economic Research, Inc.
  6. Martin Feldstein & Andrew Samwick, 1998. "The Transition Path in Privatizing Social Security," NBER Chapters, National Bureau of Economic Research, Inc, in: Privatizing Social Security, pages 215-264 National Bureau of Economic Research, Inc.
  7. Narayana R. Kocherlakota, 1996. "The Equity Premium: It's Still a Puzzle," Journal of Economic Literature, American Economic Association, American Economic Association, vol. 34(1), pages 42-71, March.
  8. Feldstein, Martin (ed.), 1998. "Privatizing Social Security," National Bureau of Economic Research Books, University of Chicago Press, edition 1, number 9780226241012, 01-2013.
  9. Martin S. Feldstein & Elena Ranguelova, 2002. "The Economics of Bequests in Pensions and Social Security," NBER Chapters, National Bureau of Economic Research, Inc, in: The Distributional Aspects of Social Security and Social Security Reform, pages 371-400 National Bureau of Economic Research, Inc.
  10. 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.
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