Demographics, Social Security Reform, and Labor Supply

At this point, it is nearly impossible to escape discussion of the aging of the baby boom and its implications for Social Security. No set of reasonable demographic and economic assumptions yields a forecast of long-term solvency for the program as it exists today (Board of Trustees 1997; Congressional Budget Office (CBO) 1997). Some reform is necessary. The open questions are which reforms and when. Among proposals for Social Security reform, the most prominent in recent discussion have been the three plans of the 1994–1996 Advisory Council. Together these plans present a wide array of policy options, but most striking are two: (i) individual defined contribution accounts and (ii) worker discretion over investment of the money in these accounts. I will refer to these reforms as individualization and investment discretion, respectively. Typically combined under the heading of privatization, each represents a distinct departure from the current program. Individualization would reduce income redistribution through Social Security and shift the program more toward a worker pension plan. Investment discretion would shift greater responsibility for old-age income variation (that is, risk) back to the individual worker. Many proponents of privatization claim that these reforms would increase investment and employment, while putting the Social Security program on a path to financial solvency. This paper focuses on the labor