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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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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. Martin Floden & Jesper Lindé, 2001. "Idiosyncratic Risk in the United States and Sweden: Is There a Role for Government Insurance?," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 4(2), pages 406-437, July.
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  12. 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.
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  14. 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.
  15. 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.
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