TY - JOUR AU - Feldstein,Martin AU - Ranguelova,Elena AU - Samwick,Andrew TI - The Transition to Investment-Based Social Security when Portfolio Returns and Capital Profitability are Uncertain JF - National Bureau of Economic Research Working Paper Series VL - No. 7016 PY - 1999 Y2 - March 1999 UR - http://www.nber.org/papers/w7016 L1 - http://www.nber.org/papers/w7016.pdf N1 - Author contact info: Martin S. Feldstein President Emeritus NBER 1050 Massachusetts Avenue Cambridge, MA 02138-5398 Tel: 617/868-3905 Fax: 617/868-7194 E-Mail: msfeldst@nber.org Elena Ranguelova Lehmann Brothers E-Mail: eranguel@lehman.com Andrew Samwick 6106 Rockefeller Hall Department of Economics Dartmouth College Hanover, NH 03755-3514 Tel: 603/646-2893 Fax: 603/646-2122 E-Mail: andrew.samwick@dartmouth.edu M1 - published as Martin Feldstein, Elena Ranguelova, Andrew Samwick. "The Transition to Investment-Based Social Security When Portfolio Returns and Capital Profitability Are Uncertain," in John Y. Campbell and Martin Feldstein, editors, "Risk Aspects of Investment-Based Social Security Reform" University of Chicago Press (2001) M2 - featured in NBER digest on 1999-07-01 AB - In this paper we study the transition from a pay-as-you-go system of Social Security pensions to an investment-based system in an economy in which portfolio returns and capital profitability are both uncertain. The paper extends earlier studies by Feldstein and Samwick that modeled the transition process in a nonstochastic environment and by Feldstein and Ranguelova that examined the implication of portfolio risk after the transition to an investment-based system has been completed. We analyze transitions to a mixed system that maintains the current 12.4 percent pay-as-you-go tax rate as well as to a system that is completely investment-based. We model intergenerational guarantees and assess the risk of such guarantees to taxpayers. We find that transitions to either a completely investment-based system or a mixed system that maintains current law benefits can be done with little additional saving in the early years (a maximum of three percent) and substantially lower combinations of taxes and saving deposits in the later years. The extra risk to retirees and/or taxpayers is relatively small, making the investment-based plans preferable to a pure pay-as-you-go system for reasonable degrees of risk aversion. ER -