Personal Social Security Accounts: Quantifying the Macro and Efficiency Effects II

Published: 2006
Project ID: UM06-07


In previous work, the authors found that a partial (50 percent) privatization of Social Security can lead to sizable efficiency gains in the presence of insurable wage shocks, due to improved labor supply incentives. But when, more realistically, wage shocks are not insurable, efficiency losses emerge from privatization despite the fact that reform induces very substantial long-run gains in capital, labor and output. Intuitively, risk sharing provided by the Social Security system through its progressive benefit formula is more significant to households than labor supply disincentives created by the system. The proposed project will add education decisions into the model, allowing households to play a role in determining their future wages. It will also incorporate correlation between longevity and household income. This project will give policymakers greater insight into how Social Security reform affects savings, wages, interest rates, and welfare across, and within, generations.



Kent Smetters