DISCOUNT RATE HETEROGENEITY AND SOCIAL-SECURITY REFORM

As many countries consider the privatization of existing pay-as-you-go Social Security systems, the option to make participation in the new system voluntary may appeal to policy makers who need to obtain the po litical support of their workers. A critical issue in evaluating such a reform and its economic consequences is the unobserved heterogeneity in households' preferences for consumption. This paper estimates the distribution of rates of time preference from the wealth data in the S urvey of Consumer Finances 1992 and a flexible life-cycle model of con sumption under income uncertainty. The estimated distribution is then applied to a variety of reform proposals that incorporate a voluntary choice of how much to contribute to a dedicated retirement account and a rebate of the existing payroll tax that increases with the magnitud e of the contribution. The main finding is that an appropriate menu of reform plans can induce the voluntary buy out of 84% of existing payr oll taxes at an immediate cost to national saving of less than 0.25 pe rcentage point. (C) 1998 Elsevier Science B.V. All rights reserved.