Efficiency Gains and Social Security Reform

Published: 2005
Project ID: UM05-19


This project has two parts. First, it proposes to generalize existing retirement models to include health and employer constraints as well as worker choice. Second, it proposes to present and analyze a Social Security reform designed to promote efficiency. Specifically, it would consider the behavioral and efficiency implications of stopping the payroll tax beyond some age, thus removing tax-induced disincentives to work. The model would avoid the controversial assumption of continuous labor-supply decisions; instead, choice of retirement age alone would govern the elasticity of the labor supply. Policy analysis would employ carefully estimated, rather than calibrated, parameter values. The policy reform this project would investigate has the advantages of being based on potential efficiency gains and of being grounded in estimated parameter values. The proposed new treatment of retirement choices offers improvements in realism over approaches assuming that workers have full latitude, or no latitude, to decide their retirement age.