NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

Simulating the Privatization of Social Security in General Equilibrium

Laurence J. Kotlikoff

NBER Working Paper No. 5776
Issued in September 1996
NBER Program(s):   AG   PE

This paper studies the macroeconomic and efficiency effects of privatizing social security. It does so by simulating alternative privatization schemes using the Auerbach-Kotlikoff Dynamic Life-Cycle Model. The simulations indicate three things. First, privatizing social security can generate very major long-run increases in output and living standards. Second the long-run gains from privatization are larger if privatization redistributes resources from initial to future generations, the pure efficiency gains from privatization are also substantial. Efficiency gains refers to the welfare improvement available to future generations after existing generations have been fully compensated for their losses from privatization. The precise size of the efficiency gain depends on the existing tax structure, the linkage between benefits and taxes under the existing social security system, and the method chosen to finance benefits during the transition. Third, at least in the long run, privatizing social security is likely to be progressive in that it improves the well-being of the lifetime poor relative to that of the lifetime rich

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Published: Simulating the Privatization of Social Security in General Equilibrium, Laurence J. Kotlikoff, in Privatizing Social Security (1998), University of Chicago Press (p. 265 - 311)

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