Personal Security Accounts and Mandatory Annuitization in a Dynastic Framework
The aging of the populations in the OECD countries has prompted various calls for reforming the existing pay-as-you-go (PAYG) pension systems. Currently, there is renewed discussion in the United States about partial privatization where a fraction of the social security payroll tax would be diverted to Personal Security Accounts. In this paper, we quantitatively evaluate the welfare effects of reforming social security by introducing a PSA with and without mandatory annuitization in an economic environment with bequests and borrowing constraints. Our setup allows us to assess whether mandatory saving or mandatory annuitization of accumulated PSA wealth at retirement is welfare enhancing, and if so, for what type of individuals. Our setup follows Fuster, Imrohoroglu, and Imrohoroglu (2003) and studies various pension schemes in a two-sided altruistic framework where social security provides insurance against individual income and lifespan uncertainty. This framework is well suited to consider the annuity role of social security for single individuals versus for households where families also provide annuity insurance to their members. Our main findings can be summarized as follows: - A majority of households prefer a PSA reform (with or without mandatory annuitization) over the current PAYG pension system. Aggregate capital, output, and consumption, as well as individuals' lifetime welfare, are higher in the reformed pension system. - Mandatory annuitization benefits most households. In light of these findings, structuring the social security reform along a two-tiered system with a safety net for low income households that do not have access to family insurance, and allowing all households to accumulate retirement wealth faster through PSAs, and finally, requiring some level of annuitization of this wealth appear welfare improving for a large fraction of households.
|Date of creation:||2005|
|Date of revision:|
|Contact details of provider:|| Postal: |
Phone: +49 (89) 9224-0
Fax: +49 (89) 985369
Web page: http://www.cesifo.de
More information through EDIRC
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.:
- Luisa Fuster, 1999.
"Is Altruism Important for Understanding the Long-Run Effects of Social Security?,"
Review of Economic Dynamics,
Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 616-637, July.
- Luisa Fuster, 1997. "Is altruism important for understanding the long-run effects of social security?," Economics Working Papers 234, Department of Economics and Business, Universitat Pompeu Fabra.
- Laitner, John, 1992. "Random earnings differences, lifetime liquidity constraints, and altruistic intergenerational transfers," Journal of Economic Theory, Elsevier, vol. 58(2), pages 135-170, December.
- Mark Huggett & Gustavo Ventura, 1998.
"On the Distributional Effects of Social Security Reform,"
9801, Centro de Investigacion Economica, ITAM.
- Mark Huggett & Gustavo Ventura, 1999. "On the Distributional Effects of Social Security Reform," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 2(3), pages 498-531, July.
- Hugett, M. & Ventura, G., 1997. "On the Distributional Effects of Social Security Reform," UWO Department of Economics Working Papers 9710, University of Western Ontario, Department of Economics.
- Peter Diamond, 1998. "The Economics of Social Security Reform," NBER Working Papers 6719, National Bureau of Economic Research, Inc.
- Storesletten, Kjetil & Telmer, Chris I. & Yaron, Amir, 1999.
"The risk-sharing implications of alternative social security arrangements,"
Carnegie-Rochester Conference Series on Public Policy,
Elsevier, vol. 50(1), pages 213-259, June.
- Kjetil Storesletten & Chris Telmer & Amir Yaron, 1998. "The risk sharing implications of alternative social security arrangements," GSIA Working Papers 252, Carnegie Mellon University, Tepper School of Business.
- Luisa Fuster & Ayse Imrohoroglu & Selahattin Imrohoroglu, 2003. "A welfare analysis of social security in a dynastic framework," International Economic Review, Department of Economics, University of Pennsylvania and Osaka University Institute of Social and Economic Research Association, vol. 44(4), pages 1247-1274, November.
When requesting a correction, please mention this item's handle: RePEc:ces:ceswps:_1405. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Julio Saavedra)
If references are entirely missing, you can add them using this form.