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Distributional Effects in a General Equilibrium Analysis of Social Security

Distributional Effects in a General Equilibrium Analysis of Social Security

Chapter:
(p.327) 8 Distributional Effects in a General Equilibrium Analysis of Social Security
Source:
The Distributional Aspects of Social Security and Social Security Reform
Author(s):
Laurence J. KotlikoffKent SmettersJan Walliser
Publisher:
University of Chicago Press
DOI:10.7208/chicago/9780226241890.003.0009

This chapter utilizes a computable general equilibrium model to analyze how the shift to an investment-based system would change wages and interest rates. Social Security's privatization can considerably raise long-run living standards. It also helps the long-run poor even absent any explicit redistribution mechanism. The long-run gains to Social Security's privatization are greater due to the status-quo alternative, which entails a significant long-run increase in the rate of payroll taxation. Furthermore, this privatization enhances the welfare across all income classes for those born in the long run and is, broadly speaking, progressive when measured with respect to its long-run welfare effects. The lifetime poor alive in the long run experience a much higher welfare gain than do the lifetime rich. The short-run welfare losses to initial younger workers are larger in the demographic model.

Keywords:   privatization, Social Security, wages, interest rates, equilibrium model, investment-based system, payroll taxation, welfare

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