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The effects of social security privatization on household saving: evidence from the Chilean experience

  • Julia Lynn Coronado
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    In recent years, a handful of countries have converted the financing of their social security systems from pay-as-you-go (PAYGO) to partial or full funding. Privatization is viewed as one way to insulate social security from the political and demographic pressures that currently threaten the financial stability of PAYGO systems. However, privatization would improve a nation's situation only if such a reform increases domestic saving. In this paper I use evidence from Chile, where social security was privatized in 1981, to assess the impact of such a reform on household saving rates. I find that the reform provided a significant stimulus for saving among higher income households, increasing their saving rates by more than seven percentage points. This increase in saving at the household level translates into an increase in national saving of more than two percent of GDP.

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    Paper provided by Board of Governors of the Federal Reserve System (U.S.) in its series Finance and Economics Discussion Series with number 1998-12.

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    Date of creation: 1998
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    Handle: RePEc:fip:fedgfe:1998-12
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    1. David Altig & Jagadeesh Gokhale, 1997. "Social Security privatization: a simple proposal," Working Paper 9703, Federal Reserve Bank of Cleveland.
    2. Kotlikoff, Laurence J, 1979. "Testing the Theory of Social Security and Life Cycle Accumulation," American Economic Review, American Economic Association, vol. 69(3), pages 396-410, June.
    3. Randall P. Mariger, 1997. "Social security privatization: what it can and cannot accomplish," Finance and Economics Discussion Series 1997-32, Board of Governors of the Federal Reserve System (U.S.).
    4. Dicks-Mireaux, Louis & King, Mervyn, 1984. "Pension wealth and household savings: Tests of robustness," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 115-139.
    5. Felipe G. Morandé, 1996. "Savings in Chile: What Went Right?," Research Department Publications 4030, Inter-American Development Bank, Research Department.
    6. Diamond, P. A. & Hausman, J. A., 1984. "Individual retirement and savings behavior," Journal of Public Economics, Elsevier, vol. 23(1-2), pages 81-114.
    7. Sheldon Danziger & Jacques Van Der Gaag & Eugene Smolensky & Michael K. Taussig, 1983. "The Life-Cycle Hypothesis and the Consumption Behavior of the Elderly," Journal of Post Keynesian Economics, M.E. Sharpe, Inc., vol. 5(2), pages 208-227, January.
    8. Martin Feldstein & Andrew Samwick, 1997. "The Economics of Prefunding Social Security and Medicare Benefits," NBER Chapters, in: NBER Macroeconomics Annual 1997, Volume 12, pages 115-164 National Bureau of Economic Research, Inc.
    9. Jagadeesh Gokhale & Laurence J. Kotlikoff & John Sabelhaus, 1996. "Understanding the Postwar Decline in U.S. Saving: A Cohort Analysis," Brookings Papers on Economic Activity, Economic Studies Program, The Brookings Institution, vol. 27(1), pages 315-407.
    10. Martin Browning & Annamaria Lusardi, 1996. "Household Saving: Micro Theories and Micro Facts," Discussion Papers 96-01, University of Copenhagen. Department of Economics.
    11. Robert Holzmann, 1997. "Pension Reform, Financial Market Development, and Economic Growth: Preliminary Evidence from Chile," IMF Staff Papers, Palgrave Macmillan, vol. 44(2), pages 149-178, June.
    12. Leimer, Dean R & Richardson, David H, 1992. "Social Security, Uncertainty Adjustments and the Consumption Decision," Economica, London School of Economics and Political Science, vol. 59(235), pages 311-35, August.
    13. Glenn R. Hubbard & Jonathan Skinner & Stephen P. Zeldes, . "Precautionary Saving and Social Insurance," Rodney L. White Center for Financial Research Working Papers 03-95, Wharton School Rodney L. White Center for Financial Research.
    14. Feldstein, Martin, 1996. "The Missing Piece in Policy Analysis: Social Security Reform," American Economic Review, American Economic Association, vol. 86(2), pages 1-14, May.
    15. Jonathan Gruber, 1995. "The Incidence of Payroll Taxation: Evidence from Chile," NBER Working Papers 5053, National Bureau of Economic Research, Inc.
    16. Felipe Morandé, 1996. "Savings in Chile: What Went Right?," IDB Publications (Working Papers) 5922, Inter-American Development Bank.
    17. Bernheim, B. Douglas, 1987. "The economic effects of social security : Toward a reconciliation of theory and measurement," Journal of Public Economics, Elsevier, vol. 33(3), pages 273-304, August.
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