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Does Social Security Privatization Produce Efficiency Gains?

  • Shinichi Nishiyama

    (Georgia State University)

  • Kent Smetters

    (The Wharton School, University of Pennsylvania)

While privatizing social security can improve labor supply incentives, it can also reduce risk sharing. We analyze a 50% privatization using an overlapping-generations model where heterogeneous agents with elastic labor supply face idiosyncratic earnings shocks and longevity uncertainty. When wage shocks are insurable, privatization produces about $18,100 of extra resources for each future household after all transitional losses have been compensated for with lump-sum taxes. When wages are not insurable, privatization reduces efficiency by about $2,400 per future household. We check the robustness of these results to different model specifications as well as policy reforms and arrive at several surprising conclusions. First, privatization performs better in a closed economy, where interest rates decline with capital accumulation, than in an open economy. Second, privatization also performs better when an actuarially fair private annuity market does not exist. Third, government matching of private contributions on a progressive basis is not very effective at restoring efficiency and can actually cause harm. (c) 2007 by the President and Fellows of Harvard College and the Massachusetts Institute of Technology..

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File URL: http://www.mitpressjournals.org/doi/pdfplus/10.1162/qjec.2007.122.4.1677
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Article provided by MIT Press in its journal Quarterly Journal of Economics.

Volume (Year): 122 (2007)
Issue (Month): 4 (November)
Pages: 1677-1719

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Handle: RePEc:tpr:qjecon:v:122:y:2007:i:4:p:1677-1719
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  1. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
  2. Juan C. Conesa & Dirk Krueger, 1999. "Social Security Reform with Heterogeneous Agents," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(4), pages 757-795, October.
  3. 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.
  4. Robert J. Shiller, 1998. "Social Security and Institutions for Intergenerational, Intragenerational, and International Risk Sharing," NBER Working Papers 6641, National Bureau of Economic Research, Inc.
  5. Flodén, Martin & Linde, Jesper, 1998. "Idiosyncratic Risk in the U.S. and Sweden: Is there a Role for Government Insurance?," Seminar Papers 654, Stockholm University, Institute for International Economic Studies.
  6. Martin Feldstein, 1995. "Would Privatizing Social Security Raise Economic Welfare?," NBER Working Papers 5281, National Bureau of Economic Research, Inc.
  7. Mariacristina De Nardi & Selahattin Imrohoglu & Thomas J. Sargent, 1998. "Projected U.S. demographics and social security," Working Paper Series WP-98-14, Federal Reserve Bank of Chicago.
  8. Shinichi Nishiyama, 2004. "Analyzing an Aging Population," 2004 Meeting Papers 175, Society for Economic Dynamics.
  9. Shinichi Nishiyama, 2002. "Bequests, Inter Vivos Transfers, and Wealth Distribution," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 5(4), pages 892-931, October.
  10. Shinichi Nishiyama, 2004. "Analyzing an Aging Population---A Dynamic General Equilibrium Approach---," CIRJE F-Series CIRJE-F-266, CIRJE, Faculty of Economics, University of Tokyo.
  11. Mariger, Randall P., 1999. "Social Security Privatization: What Are the Issues?," National Tax Journal, National Tax Association, vol. 52(n. 4), pages 783-802, December.
  12. David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
  13. Imrohoroglu, Ayse & Imrohoroglu, Selahattin & Joines, Douglas H, 1995. "A Life Cycle Analysis of Social Security," Economic Theory, Springer, vol. 6(1), pages 83-114, June.
  14. Murphy, Kevin M & Welch, Finis, 1998. "Perspectives on the Social Security Crisis and Proposed Solutions," American Economic Review, American Economic Association, vol. 88(2), pages 142-50, May.
  15. repec:cup:cbooks:9780521017039 is not listed on IDEAS
  16. Shinichi Nishiyama & Kent Smetters, 2005. "Consumption Taxes and Economic Efficiency with Idiosyncratic Wage Shocks," Journal of Political Economy, University of Chicago Press, vol. 113(5), pages 1088-1115, October.
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