TY  - JOUR
AU  - Smetters,Kent
TI  - Social Security Privatization with Elastic Labor Supply and Second-Best Taxes
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11101
PY  - 2005
Y2  - February 2005
UR  - http://www.nber.org/papers/w11101
L1  - http://www.nber.org/papers/w11101.pdf
N1  - Author contact info:
Kent Smetters
University of Pennsylvania
SH-DH 3303
3620 Locust Walk
Philadelphia, PA 19104
Tel: 215/898-9811
Fax: 215/898-0310
E-Mail: smetters@wharton.upenn.edu
AB  - This paper shows that many common methods of privatizing social security fail to reduce labor market distortions when taxes are second best, challenging a key reason to privatize. Ironically, providing "transition relief" to workers alive at the time of the reform, in an effort to protect their previous contributions, undercuts potential efficiency gains. Chile's reform -- the first major privatization that also served as a model for other countries -- actually increased labor market distortions. It is then shown that privatization with limited transition relief can reduce labor market distortions and produce gains to current and future generations without hurting initial retirees, i.e., a Pareto gain, even with second-best taxes.
ER  -