Social Security Privatization with Elastic Labor Supply and Second-Best Taxes

28 Pages Posted: 2 Mar 2005

See all articles by Kent A. Smetters

Kent A. Smetters

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

Multiple version iconThere are 2 versions of this paper

Date Written: February 2005

Abstract

This paper shows that many common methods of privatizing social security fail to reduce labor market distortions when taxes are second best, challenging a key reason to privatize. Ironically, providing "transition relief" to workers alive at the time of the reform, in an effort to protect their previous contributions, undercuts potential efficiency gains. Chile's reform -- the first major privatization that also served as a model for other countries -- actually increased labor market distortions. It is then shown that privatization with limited transition relief can reduce labor market distortions and produce gains to current and future generations without hurting initial retirees, i.e., a Pareto gain, even with second-best taxes.

Suggested Citation

Smetters, Kent, Social Security Privatization with Elastic Labor Supply and Second-Best Taxes (February 2005). NBER Working Paper No. w11101, Available at SSRN: https://ssrn.com/abstract=663483

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