Working Paper: NBER ID: w11101
Authors: Kent Smetters
Abstract: 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.
Keywords: No keywords provided
JEL Codes: H0; H2
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| Privatization methods (e.g., Chile's reform) (L33) | labor market distortions (J48) |
| Limited transition relief (F16) | labor market distortions (J48) |
| Privatization with limited transition relief (L33) | pareto gains (D61) |
| Diverting pay-as-you-go payroll taxes to private accounts (H55) | necessity of introducing new labor income tax (H29) |