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Labor Supply Responses to Social Security

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  • John Laitner

    (University of Michigan)

Abstract

The President’s Commission to Strengthen Social Security suggests three plans for reforming Social Security. These plans divert various amounts of the payroll tax to a personal account if the worker chooses to participate in the account. In return, Social Security benefits are offset using accounts with real returns ranging from 2% to 3.5%. In addition, the second and third plans proposed by the Commission include features that are designed to balance the finances of the system by reducing the rate of growth of benefits relative to the levels prescribed under current law, to make the system more redistributive, and to make other changes. When “personal accounts ” are mentioned, most people think of accounts that are in some sense separate and shielded from the uncertainties of the Social Security system. That is not the case for the personal accounts proposed by the Commission. Because the participating individual is not entitled to the principal in the account, participating in the account does not shield the individual from the political risks of being in the Social Security system. As a result, the reduction in political risk fostered by the Commission’s proposals comes mainly from the improvement in the financial status of the system fostered by other provisions of the recommended plans. Measures to improve the benefits of low-income individuals, widows and widowers and to enhance the rewards to retirement all create incentive effects that are also discussed in the paper.

Suggested Citation

  • John Laitner, 2003. "Labor Supply Responses to Social Security," Working Papers wp050, University of Michigan, Michigan Retirement Research Center.
  • Handle: RePEc:mrr:papers:wp050
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    References listed on IDEAS

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    Cited by:

    1. Shinichi Nishiyama, 2004. "Analyzing an Aging Population--A Dynamic General Equilibrium Approach: Technical Paper 2004-03," Working Papers 15191, Congressional Budget Office.
    2. Shinichi Nishiyama, 2004. "Social Security Reform in an Economy with Population Aging," Econometric Society 2004 North American Winter Meetings 582, Econometric Society.
    3. John Laitner, 2004. "Precautionary Saving Over the Lifecycle," Working Papers wp083, University of Michigan, Michigan Retirement Research Center.

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