TY - JOUR AU - Kotlikoff,Laurence J. AU - Smetters,Kent A. AU - Walliser,Jan TI - Social Security: Privatization and Progressivity JF - National Bureau of Economic Research Working Paper Series VL - No. 6428 PY - 1998 Y2 - February 1998 UR - http://www.nber.org/papers/w6428 L1 - http://www.nber.org/papers/w6428.pdf N1 - Author contact info: Laurence J. Kotlikoff Department of Economics Boston University 270 Bay State Road Boston, MA 02215 Tel: 617/353-4002 Fax: 617/353-4001 E-Mail: kotlikoff@gmail.com 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 Jan Walliser AB - This paper uses a large-scale overlapping generations model that features intragenerational heterogeneity to show that privatizing the U.S. Social Security System could be done on a progressive basis. We start with a close replica of the current system; specifically, we include Social Security's progressive linkages between taxes paid and benefits received. The paper compares achieving progressivity as part of privatization reform by a) providing a pay-as-you-go-financed minimum benefit to all agents at retirement independent of their contributions and b) matching contributions to private retirement accounts on a progressive basis. Although a pay-as-you-go-financed minimum benefit can enhance progressivity, it comes at the cost of substantially smaller long-run macroeconomic and welfare gains. The reasons are two: First, the ongoing unfunded liability to pay for the minimum benefit is roughly half of the unfunded liability of the current Social Security system. Maintaining this liability limits the effect of privatization on saving and capital accumulation. Second, the tax financing the flat minimum benefit is completely distortionary since the benefit one receives is independent of what one contributes. In contrast, matching worker's contributions on a progressive basis can achieve an equally progressive intragenerational distribution of welfare. But it affords much higher long-run levels of capital, labor supply, output and welfare. ER -