Working Paper: NBER ID: w5761
Authors: Martin Feldstein; Andrew Samwick
Abstract: 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.
Keywords: No keywords provided
JEL Codes: No JEL codes provided
Edges that are evidenced by causal inference methods are in orange, and the rest are in light blue.
| Cause | Effect |
|---|---|
| transition to a funded system (H55) | reduction in payroll tax rates (H29) |
| higher returns on capital (G31) | reduction in payroll tax rates (H29) |
| transition to a funded system (H55) | permanent increase in real income (F40) |
| transition to a funded system (H55) | additional payments required (J33) |
| transition to a funded system (H55) | net changes remain positive (O00) |
| transition to a funded system (H55) | contribution to nation’s capital stock (H54) |
| younger workers benefit over their lifetimes (J32) | transition to a funded system (H55) |
| older workers may not see sufficient compensation (J26) | transition to a funded system (H55) |