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Social Security Privatization: A Structure for Analysis

  • Olivia S. Mitchell
  • Stephen P. Zeldes

This paper identifies the key economic issues that must be addressed in the debate over a privatized social security system. We examine a two-pillar plan. The first pillar would consist of a demogrant: a small indexed pension of the same dollar amount for all retirees who had contributed to the system over a full lifetime of work. The second pillar would consist of a fully-funded individual defined-contribution account, financed by payroll taxes, held in financial institutions, and directed by participants. We explore how such a system would affect the risks households face, how it would alter the distribution of income, and how it might influence household behavior, including incentives to work and save, and portfolio choices. We also examine macroeconomic issues: how the transition to a private plan would occur, and what the likely effects would be on national saving. We conclude that a two-pillar system offers several positive features, namely a reduction in political risk, an increase in household portfolio choice, and improved work incentives. Disadvantages include less redistributiveness and national risk sharing, and increased administrative costs.

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File URL: http://www.nber.org/papers/w5512.pdf
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Paper provided by National Bureau of Economic Research, Inc in its series NBER Working Papers with number 5512.

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Date of creation: Mar 1996
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Publication status: published as American Economic Review Papers and Proceedings, Vol. 86, no.2, pp. 363-367 May 1996
Handle: RePEc:nbr:nberwo:5512
Note: AG PE
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  1. Diamond, P. A., 1977. "A framework for social security analysis," Journal of Public Economics, Elsevier, vol. 8(3), pages 275-298, December.
  2. Laurence J. Kotlikoff, 1995. "Privatization of Social Security: How it Works and Why it Matters," Boston University - Institute for Economic Development 66, Boston University, Institute for Economic Development.
  3. Panis, C.W.A. & Lillard, L.A., 1996. "Socioeconomic Differentials in the Returns to Social Security," Papers 96-05, RAND - Labor and Population Program.
  4. Salvador Valdés & Peter Diamond, . "Social Security Reforms in Chile," Documentos de Trabajo 161, Instituto de Economia. Pontificia Universidad Católica de Chile..
  5. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
  6. Martin Feldstein, 1995. "Would Privatizing Social Security Raise Economic Welfare?," NBER Working Papers 5281, National Bureau of Economic Research, Inc.
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