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The Distributional Effects of an Investment-based Social Security System

The Distributional Effects of an Investment-based Social Security System

Chapter:
(p.263) 7. The Distributional Effects of an Investment-based Social Security System
Source:
The Distributional Aspects of Social Security and Social Security Reform
Author(s):
Martin FeldsteinJeffrey B. Liebman
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226241890.003.0008

This chapter explores the distributional effect of a change from the existing pay-as-you-go (PAYGO) U.S. Social Security system to one that combines both PAYGO and investment-based elements. The shift to the personal retirement account (PRA) system is potentially more significant for blacks than it is for whites in combating poverty in old age. Individuals with higher earnings and benefit levels receive more weight in the internal rate-of-return calculations. Furthermore, higher income groups tend to receive benefit increases from a PRA system relative to the Social Security system that are larger than those of lower income groups. All demographic and income groups can benefit from an investment-based system with a lower saving rate than the projected long-run PAYGO tax, and that the potential reductions in poverty are the largest for those most at risk of poverty.

Keywords:   distributional effect, pay-as-you-go, U.S. Social Security system, investment-based system, earnings, personal retirement account, income, saving

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