Structural Reform of Social Security

NBER Working Paper No. 11098^*
Issued in February 2005
NBER Program(s): AG AP PE

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---- Abstract -----

Governments around the world have enacted or are currently considering fundamental structural reforms of their Social Security pension programs. The key feature in these reforms is a shift from a pure pay-as-you-go tax-financed system, in which taxes on current workers are primarily distributed to current retirees, to a mixed system that combines pay-as-you-go benefits with investment-based personal retirement accounts.

This paper discusses how such a mixed system could work in practice and how the transition to such a change could be achieved. It then analyzes the economic gains that would result from shifting to a mixed system. I turn next to the three problems that critics raise about any investment-based plan: administrative costs, risk, and income distribution. Finally, I comment on some of the ad hoc proposals for dealing with the financial problem of Social Security without shifting to an investment-based system.

^*Published: Feldstein, Martin. "Structural Reform Of Social Security," Journal of Economic Perspectives, 2005, v19(2,Spring), 33-55.

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