The Transition to Investment-Based Social Security when Portfolio Returns and Capital Profitability are Uncertain

Martin Feldstein, Elena Ranguelova and Andrew Samwick

No 7016, NBER Working Papers from National Bureau of Economic Research, Inc

Abstract: In this paper we study the transition from a pay-as-you-go system of Social Security pensions to an investment-based system in an economy in which portfolio returns and capital profitability are both uncertain. The paper extends earlier studies by Feldstein and Samwick that modeled the transition process in a nonstochastic environment and by Feldstein and Ranguelova that examined the implication of portfolio risk after the transition to an investment-based system has been completed. We analyze transitions to a mixed system that maintains the current 12.4 percent pay-as-you-go tax rate as well as to a system that is completely investment-based. We model intergenerational guarantees and assess the risk of such guarantees to taxpayers. We find that transitions to either a completely investment-based system or a mixed system that maintains current law benefits can be done with little additional saving in the early years (a maximum of three percent) and substantially lower combinations of taxes and saving deposits in the later years. The extra risk to retirees and/or taxpayers is relatively small, making the investment-based plans preferable to a pure pay-as-you-go system for reasonable degrees of risk aversion.

JEL-codes: H55 (search for similar items in EconPapers)
Date: 1999-03
New Economics Papers: this item is included in nep-pbe and nep-pol
Note: AG PE
References: View references in EconPapers View complete reference list from CitEc
Citations: View citations in EconPapers (21)

Published as Risk Aspects of Investment Based Social Security Reform, Campbell, John and Martin Feldstein, eds., Chicago: University of Chicago Press, 1999,forthcoming.
Published as The Transition to Investment-Based Social Security When Portfolio Returns and Capital Profitability Are Uncertain , Martin Feldstein, Elena Ranguelova, Andrew Samwick. in Risk Aspects of Investment-Based Social Security Reform , Campbell and Feldstein. 2001

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Chapter: The Transition to Investment-Based Social Security When Portfolio Returns and Capital Profitability Are Uncertain (2001)
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