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Author: Margaret Womble

Privatization of Pensions

In the Fehr, et al paper, “Will China Eat Our Lunch or Take us to Dinner?,” the authors discuss various ways for the government to finance the welfare programs promised to the retiring baby boomers. One analysis looked at the privatization of pensions, modeled by “the elimination of any new public pension benefit accrual coupled with the establishment of individual accounts.” Basically, this privatization of pensions relies heavily on the effectiveness of free markets, as well as an “intergenerational redistribution.” The privatization of pensions would place the burden on the current elderly, as they would be “forced to pay for their benefits via the consumption tax.” Instead, “younger and future generations benefit enormously” because their wages are much higher without the payroll tax burden. While the Fehr papers notes that “the poor initially experience larger welfare losses,” Allan Meltzer thinks differently.