The Transition to Investment-Based Social Security When Portfolio Returns and Capital Profitability are Uncertain

70 Pages Posted: 27 Mar 1999 Last revised: 12 Oct 2010

See all articles by Martin S. Feldstein

Martin S. Feldstein

National Bureau of Economic Research (NBER); Harvard University

Elena Ranguelova

Investcorp

Andrew A. Samwick

Dartmouth College - Department of Economics; National Bureau of Economic Research (NBER)

Date Written: March 1999

Abstract

In this paper we study the transition from a pay-as-you-go system of Social Security pensions to an investment-based system in an economy in which portfolio returns and capital profitability are both uncertain. The paper extends earlier studies by Feldstein and Samwick that modeled the transition process in a nonstochastic environment and by Feldstein and Ranguelova that examined the implication of portfolio risk after the transition to an investment-based system has been completed. We analyze transitions to a mixed system that maintains the current 12.4 percent pay-as-you-go tax rate as well as to a system that is completely investment-based. We model intergenerational guarantees and assess the risk of such guarantees to taxpayers. We find that transitions to either a completely investment-based system or a mixed system that maintains current law benefits can be done with little additional saving in the early years (a maximum of three percent) and substantially lower combinations of taxes and saving deposits in the later years. The extra risk to retirees and/or taxpayers is relatively small, making the investment-based plans preferable to a pure pay-as-you-go system for reasonable degrees of risk aversion.

Suggested Citation

Feldstein, Martin S. and Ranguelova, Elena and Samwick, Andrew A., The Transition to Investment-Based Social Security When Portfolio Returns and Capital Profitability are Uncertain (March 1999). NBER Working Paper No. w7016. Available at SSRN: https://ssrn.com/abstract=155554

Martin S. Feldstein (Contact Author)

National Bureau of Economic Research (NBER) ( email )

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Harvard University ( email )

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Elena Ranguelova

Investcorp ( email )

United States

Andrew A. Samwick

Dartmouth College - Department of Economics ( email )

Hanover, NH 03755
United States
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603-646-2122 (Fax)

HOME PAGE: http://www.dartmouth.edu/~samwick

National Bureau of Economic Research (NBER)

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