The Transition Path in Privatizing Social Security

65 Pages Posted: 3 Dec 1996 Last revised: 16 May 2000

See all articles by Martin S. Feldstein

Martin S. Feldstein

National Bureau of Economic Research (NBER); Harvard University

Andrew A. Samwick

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

Date Written: September 1996

Abstract

This paper analyzes the transition from the existing pay-as-you-go Social Security program to a system of funded Mandatory" Individual Retirement Accounts (MIRAs). Because of the high return on real capital relative to the very low return in a mature pay-as-you-go program, the benefits that can be financed with the existing 12.4 percent payroll tax could eventually be funded with mandatory contributions of only 2.1 percent of payroll. A transition to that fully funded program could be done with a surcharge of less than 1.5 percent of payroll during the early part of the transition. After 25 years, the combination of financing the pay-as-you-go benefits and accumulating the funded accounts would require less than the current 12.4 percent of payroll. The paper also discusses how a MIRA system could deal with the benefits of low income employees and with the risks associated with uncertain longevity and fluctuating market returns.

Suggested Citation

Feldstein, Martin S. and Samwick, Andrew A., The Transition Path in Privatizing Social Security (September 1996). NBER Working Paper No. w5761. Available at SSRN: https://ssrn.com/abstract=4475

Martin S. Feldstein (Contact Author)

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Andrew A. Samwick

Dartmouth College - Department of Economics ( email )

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

National Bureau of Economic Research (NBER)

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