Does Social Security Crowd out Private Wealth? A Survey of the Literature

Abstract

Economic theory does not give clear predictions on the impact of social security on private wealth. The theoretical ambiguity and practical importance generated a large stream of empirical research. In this paper, we review the available evidence on displacement effects of social security. Our review includes over 100 theoretical and empirical contributions.

Nearly 70% of the literature identifies the statistically significant impact of social security wealth on different forms of private savings. A strong majority of authors, who obtain statistically significant results find the negative impact of social security on private savings. The size of the impact varies. If we consider all contributions median study identifies a statistically significant, but small negative impact of social security on private wealth.

Although the literature is large it has some common limitations. Probably the most important is the use of uniform and static life tables, which biases the true value of social security wealth. The literature is largely focused on developed economies, availability of research on middle-income and developing countries is low.

Keywords: social security, private wealth, crowd-out effect, substitution, household wealth, public pension system

JEL Classification: D14, D15, H55