Review

The author discusses a policy proposal for dealing with Social Security that would provide all wage classes of workers, of all ages, approximately the level of benefits currently in place.

The authors discuss their plan to redress current problems with Social Security by replacing the Old-Age Insurance portion of Social Security with a system of individual accounts and by establishing a dedicated stream of revenues to pay off the current system’s unfunded liability.

To understand why Chile’s restructuring of its social security system has caught the attention of its Latin American neighbors—and many other nations as well—the authors first ask what that country did and why. They next summarize what other countries did, following in Chile’s footsteps. Finally, they offer a brief assessment of the Latin model for social security reform.

This analysis establishes that, in the model economy, a pay-as-you-go social security scheme can be replaced by an actuarially fair pension system very like the plan suggested by the Advisory Council on Social Security. This result holds even in the presence of a minimum income guarantee means tests for benefits.

This article uses simulations in a stylized model—the Auerbach-Kotlikoff Dynamic Life Cycle model—to explore some possible economic outcomes of privatizing Social Security in the United States: first, the potential impact on the macro economy; second, how different generations may be affected (in particular, whether privatization will enhance or undermine intragenerational equity); and, third, some efficiency gains that might arise from privatization.