List of References
Diamond, Peter; Lindemena, David; Young, Howard (eds.) Social Security: What Role for the Future?, Washington D.C.: National Academy of Social Insurance, 1996.
Feldstein, Martin, “The Missing Piece in Policy Analysis: Social Security Reform,” National Bureau of Economic Research, Working Paper No. 5413, January 1996a.
Feldstein, Martin, “Social Security and Private Savings: International Evidence in an Extended Life Cycle Model,” in Martin Feldstein and Robert Inman (eds.), The Economics of Public Services, (New York: Halsted Press) 1977.
Feldstein, Martin, and Anthony Pellechio, “Social Security and Household Wraith Accumulation: New Microeconomic Evidence,” Review of Economics and Statistics, August 1979, Vol. 61(3).
Leimer, Dean R. and Selig D. Lesnoy, “Social Security and Private Saving: New Time-Series Evidence,” Journal of Political Economy, Vol. 90(3), 1982.
Prepared by Michael Leidy. A complete description of the model and the analyst summarized here is given in Leidy (1997).
There are two Social Security trust funds: the trust fund for Old-Age and Survivors Insurance (OASI, which pays retirement and survivors benefits) and Disability Insurance (DI, which pays disability benefits).
In the Advisory Council report, only the plan identified as “Maintain Benefits” calls specifically for a fraction of trust fund reserves to be invested in equities. However, the other two plans (Individual Accounts and Personal Security Accounts) include provisions to establish individual savings accounts, part of which could be invested in equities.
Investing trust fund assets in private securities is not equivalent to privatizing Social Security (either folly or in part). To be effective, privatization of the system would necessitate raising national saving to fill at least part of Social Security’s unfunded liability. A simple proposal to diversify trust fund assets by investing in private securities would not produce the needed increase in national saving; essentially, it would only redistribute investment income between the private and public sector and redistribute real resources between the current and future generations of workers.
A “pay-as-you-go” system implies that the current benefits of retirees are financed out of current payroll tax receipts. Under such a system, benefits are defined and the financing burden facing current workers depends on the size of the guaranteed benefits to current retirees relative to any trust fund assets that may have been accumulated from past contributions.
The expected yield is not included in the aggregate saving function in the model. The response of private saving to a change in the expected yield is ambiguous theoretically and empirical work on aggregate savings in the United States typically indicates that the income and substitution effects induced by a change in yield are largely offsetting.
It should also be pointed out that current retirees under the pay-as-you-go system may not have folly contributed to the benefits that they are receiving, depending on when the system was established and how the defined benefits may have been modified over time. In such circumstances, current workers would pay for the benefits of current retirees, as well as for a larger part of their own future benefits, if trust fund assets were invested in private securities.