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The Distributional Effects of an Investment-Based Social Security System

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  • Martin Feldstein
  • Jeffrey Liebman

Abstract

In this paper we study the distributional impact of a change from the existing pay-as-you-go Social Security system to one that combines both pay-as-you-go and investment-based elements. Critics of investment-based plans have been concerned that such plans might reduce the retirement income of low-paid workers or of surviving spouses relative to what they would get from Social Security, and might therefore increase the extent of poverty among the aged. Our analysis in this paper shows that this is generally not the case, even in plans that make no special effort to maintain or increase redistribution. Our principal finding is that virtually all of the demographic groups that we examine would receive higher average benefits under a mixed system with an investment-based component than the benefits that they would receive under current Social Security rules. There would also be a smaller share of individuals with benefits below the poverty line even though the total cost of funding the mixed system -- a three percent saving contribution rather than a six percent rise in the tax rate -- is substantially lower than that of funding the pay-as-you-go system. Our individual-level data permit us to go beyond comparing group means to analyze the full distribution of the benefits that individuals would receive under the two different systems. These comparisons show that the overwhelming majority of individuals would have higher benefits with the investment-based system than with the pure pay-as-you-go system. The relatively small number of individuals who would receive less from the investment-based system is further reduced when the effects of the Supplementary Security Income program is taken into account. These basic conclusions remain true even if the future rate of return in the investment-based component of the mixed system is substantially less than past experience implies.

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Bibliographic Info

Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 7492.

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Date of creation: Jan 2000
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Publication status: published as Martin S. Feldstein, Jeffrey B. Liebman. "The Distributional Effects of an Investment-Based Social Security System," in Martin Feldstein and Jeffrey B. Liebman, editors, "The Distributional Aspects of Social Security and Social Security Reform" University of Chicago Press (2002) Martin S. Feldstein, Jeffrey B. Liebman. "The Distributional Effects of an Investment-Based Social Security System," in Martin Feldstein and Jeffrey B. Liebman, editors, "The Distributional Aspects of Social Security and Social Security Reform" University of Chicago Press (2002)
Handle: RePEc:nbr:nberwo:7492

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  1. Douglas W. Elmendorf & Jeffrey B. Liebman, 2000. "Social Security Reform and National Saving in an Era of Budget Surpluses," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 31(2), pages 1-72.
  2. Judith Chevalier & Glenn Ellison, 1999. "Career Concerns Of Mutual Fund Managers," The Quarterly Journal of Economics, MIT Press, vol. 114(2), pages 389-432, May.
  3. Coronado Julia Lynn & Fullerton Don & Glass Thomas, 2011. "The Progressivity of Social Security," The B.E. Journal of Economic Analysis & Policy, De Gruyter, vol. 11(1), pages 1-45, November.
  4. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
  5. Martin Feldstein & Andrew Samwick, 1997. "The Economics of Prefunding Social Security and Medicare Benefits," NBER Working Papers 6055, National Bureau of Economic Research, Inc.
  6. Alan L. Gustman & Thomas L. Steinmeier, 1998. "Social Security Benefits of Immigrants and U.S. Born," NBER Working Papers 6478, National Bureau of Economic Research, Inc.
  7. Michael D. Hurd & John B. Shoven, 1986. "The Distributional Impact of Social Security," NBER Working Papers 1155, National Bureau of Economic Research, Inc.
  8. 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.
  9. Lee, Ronald & Tuljapurkar, Shripad, 1998. "Uncertain Demographic Futures and Social Security Finances," American Economic Review, American Economic Association, vol. 88(2), pages 237-41, May.
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Cited by:
  1. Louis Kaplow, 2011. "Targeted savings and labor supply," International Tax and Public Finance, Springer, vol. 18(5), pages 507-518, October.
  2. Casarico, Alessandra & Devillanova, Carlo, 2003. "Capital-Skill Complementarity and the Redistributive Effects of Social Security Reform," CEPR Discussion Papers 3773, C.E.P.R. Discussion Papers.
  3. Jimeno, Juan F. & Rojas, Juan A. & Puente, Sergio, 2008. "Modelling the impact of aging on social security expenditures," Economic Modelling, Elsevier, vol. 25(2), pages 201-224, March.
  4. Jeffrey B. Liebman, 2001. "Redistribution in the Current U.S. Social Security System," NBER Working Papers 8625, National Bureau of Economic Research, Inc.
  5. S. Boragan Aruoba & Jesus Fernandez-Villaverde & Juan F. Rubio-Ramirez, 2003. "Comparing Solution Methods for Dynamic Equilibrium Economies," PIER Working Paper Archive 04-003, Penn Institute for Economic Research, Department of Economics, University of Pennsylvania.
  6. Binswanger, Johannes, 2007. "Risk management of pensions from the perspective of loss aversion," Journal of Public Economics, Elsevier, vol. 91(3-4), pages 641-667, April.
  7. Martin Feldstein, 2005. "Structural Reform of Social Security," NBER Working Papers 11098, National Bureau of Economic Research, Inc.
  8. Luís Eduardo Afonso & Reynaldo Fernandes, 2003. "Uma Estimativa dos Aspectos Distributivos da Previdência Social no Brasil," Anais do XXXI Encontro Nacional de Economia [Proceedings of the 31th Brazilian Economics Meeting] f15, ANPEC - Associação Nacional dos Centros de Pósgraduação em Economia [Brazilian Association of Graduate Programs in Economics].
  9. Alan L. Gustman & Thomas L. Steinmeier, 2000. "How Effective is Redistribution Under the Social Security Benefit Formula?," Working Papers wp005, University of Michigan, Michigan Retirement Research Center.
  10. Pfau, Wade Donald, 2007. "Reforming Social Security: Issues and Challenges for Personal Retirement Accounts," MPRA Paper 19034, University Library of Munich, Germany.
  11. Dennis Fredriksen & Nils Martin Stølen, 2005. "Effects of demographic development, labour supply and pension reforms on the future pension burden," Discussion Papers 418, Research Department of Statistics Norway.
  12. Arza, Camila, 2008. "The Limits of Pension Privatization: Lessons from Argentine Experience," World Development, Elsevier, vol. 36(12), pages 2696-2712, December.

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