Social Security Privatization with Income-Mortality Correlation

43 Pages Posted: 21 Feb 2008

See all articles by Shinichi Nishiyama

Shinichi Nishiyama

Congressional Budget Office

Kent A. Smetters

University of Pennsylvania - Business & Public Policy Department; National Bureau of Economic Research (NBER)

Date Written: November 2006

Abstract

While privatizing Social Security can improve labor supply incentives, it can also reduce risk sharing. We simulate a 50-percent privatization using an overlapping-generations model where heterogeneous agents with elastic labor supply face idiosyncratic earnings shocks and longevity uncertainty. When wage shocks are insurable, privatization produces about $30,100 of extra resources for each future household after all transitional losses have been paid. When wages are not insurable, privatization reduces efficiency by about $8,100 per future household. We check the robustness of these results to different model specifications as well as policy reforms and arrive at several surprising conclusions. First, privatization performs better in a closed economy, where interest rates decline with capital accumulation, than in an open economy. Second, privatization also performs better when an actuarially-fair private annuity market does not exist. Third, government matching of private contributions on a progressive basis is not very effective at restoring efficiency and can actually harm.

Suggested Citation

Nishiyama, Shinichi and Smetters, Kent, Social Security Privatization with Income-Mortality Correlation (November 2006). Michigan Retirement Research Center Research Paper No. WP 2006-140, Available at SSRN: https://ssrn.com/abstract=1095298 or http://dx.doi.org/10.2139/ssrn.1095298

Shinichi Nishiyama (Contact Author)

Congressional Budget Office ( email )

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Kent Smetters

University of Pennsylvania - Business & Public Policy Department ( email )

3641 Locust Walk
Philadelphia, PA 19104-6372
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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