The Transition Path in Privatizing Social Security

Martin Feldstein, Andrew Samwick

NBER Working Paper No. 5761
Issued in September 1996
NBER Program(s):   PE

This paper analyzes the transition from the existing pay-as-you-go Social Security program to a system of funded Mandatory" Individual Retirement Accounts (MIRAs). Because of the high return on real capital relative to the very low return in a mature pay-as-you-go program, the benefits that can be financed with the existing 12.4 percent payroll tax could eventually be funded with mandatory contributions of only 2.1 percent of payroll. A transition to that fully funded program could be done with a surcharge of less than 1.5 percent of payroll during the early part of the transition. After 25 years, the combination of financing the pay-as-you-go benefits and accumulating the funded accounts would require less than the current 12.4 percent of payroll. The paper also discusses how a MIRA system could deal with the benefits of low income employees and with the risks associated with uncertain longevity and fluctuating market returns.

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Published:

• Privatizing Social Security, Feldstein, Martin, ed., Chicago: Universityof Chicago Press, 1998, pp. 215-260. ,
• The Transition Path in Privatizing Social Security, Martin Feldstein, Andrew Samwick, in Privatizing Social Security (1998), University of Chicago Press
  

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