The Transition Path in Privatizing Social Security

Martin S. Feldstein and Andrew Samwick

No 5761, NBER Working Papers from National Bureau of Economic Research, Inc

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.

JEL-codes: H55 (search for similar items in EconPapers)
Date: 1996-09
Note: PE
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Chapter: The Transition Path in Privatizing Social Security (1998)
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