The Distributional Effects of an Investment-based Social Security System

Martin Feldstein and Jeffrey B. Liebman

in The Distributional Aspects of Social Security and Social Security Reform

Published by University of Chicago Press

Published in print June 2002 | ISBN: 9780226241067
Published online February 2013 | e-ISBN: 9780226241890 | DOI:
The Distributional Effects of an Investment-based Social Security System

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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

Chapter.  21784 words.  Illustrated.

Subjects: Public Economics

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