Redistribution, Distortions, and the Welfare Effects of Social Security

Youngsoo Jang (), Svetlana Pashchenko () and Ponpoje Porapakkarm ()
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Youngsoo Jang: University of Queensland
Svetlana Pashchenko: University of Georgia
Ponpoje Porapakkarm: National Graduate Institute for Policy Studies

No 2025-012, Working Papers from Human Capital and Economic Opportunity Working Group

Abstract: What is the best way to reform Social Security? Academic literature offers diverging advice. There is a well-known result that the optimal size of Social Security is zero, implying it is best to phase the program out. Other studies argue that much can be gained by redesigning the program, given its current size. We provide a unified analysis that examines how the optimal size of Social Security depends on the key features of its design. We first develop a theoretical decomposition tracing the program's welfare effects to (i) income redistribution, (ii) distortions on the annuitization level, and (iii) intertemporal distortions. We then quantitatively assess the role of these channels. We show that the zero-optimal-size result arises because Social Security is too distortive and not redistributive enough. Once these design flaws are corrected, it is even optimal to increase the size of the program.

Keywords: pensions; annuities; consumption and saving; life-cycle model (search for similar items in EconPapers)
JEL-codes: D15 E60 H55 (search for similar items in EconPapers)
Date: 2026-01
New Economics Papers: this item is included in nep-age and nep-dge
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