The Optimal Design of Social Security Benefits
The United States Social Security system is fairly unique in that it explicitly allows for a progressive formulation of retirement benefits by assigning a larger replacement rate to workers with small pre-retirement wages. In contrast, the public pension systems in other countries often replace a constant fraction of pre-retirement wages, although the length of the “averaging period" is typically shorter relative to the U.S. This paper examines the ex-ante optimal U.S. Social Security benefit structure using the model developed in Nishiyama and Smetters (2007). On one hand, progressivity in the benefit structure provides risk sharing against shocks that are difficult to insure privately. On the other hand, progressivity introduces various marginal tax rates that distort labor supply. Rather surprisingly, we find that the ex-ante best U.S. Social Security replacement rate structure is fairly “flat.” Intuitively, the relatively long averaging period used in the U.S. system formulation already provides some insurance against negative idiosyncratic shocks, but in a manner that is more efficient than explicit redistribution.
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- Shinichi Nishiyama & Kent Smetters, 2007.
"Does Social Security Privatization Produce Efficiency Gains?,"
The Quarterly Journal of Economics,
Oxford University Press, vol. 122(4), pages 1677-1719.
- Shinichi Nishiyama & Kent Smetters, 2005. "Does Social Security Privatization Produce Efficiency Gains?," Working Papers wp106, University of Michigan, Michigan Retirement Research Center.
- Shinichi Nishiyama & Kent Smetters, 2005. "Does Social Security Privatization Produce Efficiency Gains?," NBER Working Papers 11622, National Bureau of Economic Research, Inc.
- David Altig, 2001. "Simulating Fundamental Tax Reform in the United States," American Economic Review, American Economic Association, vol. 91(3), pages 574-595, June.
- Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics,in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.