The Optimal Design of Social Security Benefits

Th is research examines the ex-ante optimal U.S. Social Security benefi t structure using the model developed in Nishiyama and Smetters (2007). Whereas NS2007 analyzed the effi ciency of diff erent, specifi c alternative designs of the U.S. Social Security system, the current paper attempts to derive the ex-ante best system design among a larger range of diff erent potential Social Security formulations. By “ex ante optimal,” we mean that we search for the best policy conditional on households not yet entering the workforce. In contrast, NS2007 analyzed Hicksian effi ciency gains or losses associated with diff erent policies from an “interim” perspective where households have already realized their initial productivity types, which is highly correlated with the producti ity earned throughout the rest of their lifecycle. Th e “ex ante” position, however, naturally places more emphasis on the importance of risk since even the initial household productivity type has not been materialized.