Quantifying the Inefficiency of the US Social Security System

How far is the US social insurance system from an e±cient system? We answer this question within a model where agents receive idiosyncratic, labor-productivity shocks that are privately observed. When social security and income taxation comprise the social insurance system, the maximum possible e±ciency gain is equivalent to a 10.5 percent increase in consumption. This occurs when labor productivity diferences are set to the permanent diferences estimated in US data.