Social Security privatization: balancing efficiency and fairness

Abstract

This article examines these fundamental issues of economic efficiency and fairness that should be weighed when considering Social Security privatization. The first section summarizes the challenges to the current system and outlines various options for reform. The second section explains how privatization could improve economic efficiency, and briefly considers the difficult issue of the transition costs in moving from the current system to full privatization. The third section discusses important issues of fairness within and across generations. Any decision to privatize Social Security will require balancing the likely gains of greater real output and fairer returns to younger generations with the possible adverse effects of a more unequal income distribution among retirees and greater investment risks. This balancing must occur through the political process because fairness is a matter of values rather than economic analysis.Social security