The Missing Piece in Policy Analysis: Social Security Reform

Martin Feldstein

No 5413, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: This lecture discusses the economic losses that result from an unfunded social security retirement system and the potential gain from shifting to a funded system. The social security payroll tax distorts labor supply and the form in which compensation is paid. Although each individual's benefits are linked to that individual's previous payroll tax payments, the low equilibrium rate of return inherent in an unfunded system implies a `net' payroll tax that causes distortions. The resulting deadweight loss is 1% of each year's GDP in perpetuity, an amount equal to 20% of payroll tax revenue and a 50% increase in deadweight loss of the personal income tax. Also, there is the loss of investment income resulting from forcing employees to accept the low implicit return of an unfunded program rather than the much higher return paid on private saving or in a funded social security program. The present value of the annual losses from using an unfunded system exceeds the benefit to those who received windfall transfers when the program began and when it expanded. Shifting to a funded program cannot reverse the crowding out of capital that has already occurred. Recognizing the existing unfunded obligation only makes that piece of the national debt explicit, but shifting to a funded program limits crowding out of capital formation to the amount that already occurred. Future increases in annual saving that result from economic growth are able to earn the higher rate of return on real capital. The present value of these gains is equivalent to a perpetuity of more than 2% of GDP a year. The combi- nation of improved labor market incentives and higher real return on saving has a net present value gain of more than $15 trillion, an amount equivalent to three percent of each future year's GDP forever.

JEL-codes: H55 (search for similar items in EconPapers)
Date: 1996-01
Note: PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (167)

Published as The Richard T. Ely Lecture, in American Economic Review, 86, No.2, May 1996 , pp.1-14.

Downloads: (external link)
http://www.nber.org/papers/w5413.pdf (application/pdf)

Related works:
Journal Article: The Missing Piece in Policy Analysis: Social Security Reform (1996)
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:nbr:nberwo:5413

Ordering information: This working paper can be ordered from
http://www.nber.org/papers/w5413

Access Statistics for this paper

More papers in NBER Working Papers from National Bureau of Economic Research, Inc National Bureau of Economic Research, 1050 Massachusetts Avenue Cambridge, MA 02138, U.S.A.. Contact information at EDIRC.
Bibliographic data for series maintained by ().