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Social Security Privatization with Elastic Labor Supply and Second-Best Taxes

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  • Kent Smetters

Abstract

This paper shows that many common methods of privatizing social security fail to reduce labor market distortions when taxes are second best, challenging a key reason to privatize. Ironically, providing "transition relief" to workers alive at the time of the reform, in an effort to protect their previous contributions, undercuts potential efficiency gains. Chile's reform -- the first major privatization that also served as a model for other countries -- actually increased labor market distortions. It is then shown that privatization with limited transition relief can reduce labor market distortions and produce gains to current and future generations without hurting initial retirees, i.e., a Pareto gain, even with second-best taxes.

Suggested Citation

  • Kent Smetters, 2005. "Social Security Privatization with Elastic Labor Supply and Second-Best Taxes," NBER Working Papers 11101, National Bureau of Economic Research, Inc.
    • Handle: RePEc:nbr:nberwo:11101
    Note: AG PE
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    References listed on IDEAS

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    Cited by:

    1. Robert Holzmann & Richard Hinz, 2005. "Old Age Income Support in the 21st century: An International Perspective on Pension Systems and Reform," World Bank Publications - Books, The World Bank Group, number 7336.

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    JEL classification:

    • H0 - Public Economics - - General
    • H2 - Public Economics - - Taxation, Subsidies, and Revenue

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