Does Social Security Privatization Produce Efficiency Gains? Working Paper 2005-04

The economic literature shows that privatizing Social Security can improve labor supply incentives, but it can also reduce risk sharing when households face uninsurable risks. We simulate a stylized 50-percent privatization with transaction costs financed by consumption taxes and examined its impact on macroeconomic variables as well as on the welfare across generations and income classes. Our overlapping-generations model includes heterogeneous agents with elastic labor supply who face idiosyncratic earnings shocks and longevity uncertainty. The transition path is calculated, which allows us