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Key Findings Details

The Optimal Design of Social Security Benefits
Shinichi Nishiyama and Kent Smetters
WP 2008-197

  • Progressivity in the Social Security benefit structure provides risk sharing against shocks that are difficult to insure privately. On the other hand, progressivity introduces various marginal tax rates that distort labor supply.
  • Our analysis finds that the best U.S. Social Security replacement rate structure is fairly “flat.” Intuitively, the relatively long averaging period used in the U.S. system benefit formulation already provides some insurance against negative wage shocks, but in a manner that is more efficient than explicit redistribution.