Social Security: Privatization and Progressivity
This paper uses a large-scale overlapping generations model that features intragenerational heterogeneity to show that privatizing the U.S. Social Security System could be done on a progressive basis. We start with a close replica of the current system; specifically, we include Social Security's progressive linkages between taxes paid and benefits received. The paper compares achieving progressivity as part of privatization reform by a) providing a pay-as-you-go-financed minimum benefit to all agents at retirement independent of their contributions and b) matching contributions to private retirement accounts on a progressive basis. Although a pay-as-you-go-financed minimum benefit can enhance progressivity, it comes at the cost of substantially smaller long-run macroeconomic and welfare gains. The reasons are two: First, the ongoing unfunded liability to pay for the minimum benefit is roughly half of the unfunded liability of the current Social Security system. Maintaining this liability limits the effect of privatization on saving and capital accumulation. Second, the tax financing the flat minimum benefit is completely distortionary since the benefit one receives is independent of what one contributes. In contrast, matching worker's contributions on a progressive basis can achieve an equally progressive intragenerational distribution of welfare. But it affords much higher long-run levels of capital, labor supply, output and welfare.
|Date of creation:||Feb 1998|
|Date of revision:|
|Publication status:||published as American Economic Review, Vol. 88, no. 2 (May 1998): 137-141.|
|Contact details of provider:|| Postal: National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.|
Web page: http://www.nber.org
More information through EDIRC
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Walliser, Jan, 2000. " Adverse Selection in the Annuities Market and the Impact of Privatizing Social Security," Scandinavian Journal of Economics, Wiley Blackwell, vol. 102(3), pages 373-93, June.
- Smetters, Kent & Walliser, Jan, 2004. "Opting out of social security," Journal of Public Economics, Elsevier, vol. 88(7-8), pages 1295-1306, July.
- Martin Feldstein & Andrew Samwick, 1996.
"The Transition Path in Privatizing Social Security,"
NBER Working Papers
5761, National Bureau of Economic Research, Inc.
- Martin Feldstein & Andrew Samwick, 1998. "The Transition Path in Privatizing Social Security," NBER Chapters, in: Privatizing Social Security, pages 215-264 National Bureau of Economic Research, Inc.
- Henning Bohn, 1997. "Social Security reform and financial markets," Conference Series ; [Proceedings], Federal Reserve Bank of Boston, vol. 41(Jun), pages 193-227.
When requesting a correction, please mention this item's handle: RePEc:nbr:nberwo:6428. See general information about how to correct material in RePEc.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: ()
If references are entirely missing, you can add them using this form.