So many different ways to insure against uninsurable
The existing view in the literature is that linking pensions to individual incomes rather than average wages reduces distortions, but removes insurance and hence cannot raise welfare in an economy with idiosyncratic income shocks. We study alternative channels of providing insurance and efficiency gain from both strengthening the labor supply incentives and higher capital accumulation due to partial funding. We show labor tax progression can effectively substitute for the insurance implicit in redistributive social security. Thus, privatizing social security can deliver aggregate welfare gains even under uncertainty about future incomes.
We presented this work-in-progress paper during a Public Sector Economics 2020 Conference, with nearly 60 participants during this very intensive but also rewarding online event.