Partial replacement of the traditional unfunded pension system with a new system of private investment accounts can potentially increase saving and improve incentives for labor force participation later in life. Both of these responses would lead to higher levels of future income. In this paper we investigate whether these effects are likely to occur and the potential size of the effects on private and total saving and on employment past age 55. Policymakers can follow two approaches to pension

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... reform that can lead to greater advance funding of future pension obligations. They can immediately increase taxes or reduce benefits in the public pension program so as to increase the accumulation of reserves held by the pension fund. Or they can establish a new system of private pension accounts in which workers build up private funds that will later be used to finance retirement benefits. An important advantage of advance funding is that it can lead to an increase in saving, faster growth in the capital stock, and higher future national income. These results will only occur, however, if the additions to pension reserves lead to an increase in public or private saving. We evaluate the empirical evidence on government saving responsiveness to faster public pension fund accumulation. The experience of U.S. state government suggests that faster accumulation of reserves in public employee pension funds adds almost $1 of additional state government saving for each additional $1 that is added to the funds. State governments do not offset faster saving in the pension funds by running larger deficits or smaller surpluses in other state government budget accounts. The experience of national governments in the OECD is quite different. Faster accumulation of assets in national social insurance systems is largely offset by larger deficits or smaller surpluses in other national government budget accounts. If the state-level experiences could be duplicated at the U.S. federal government level, faster accumulation of saving in the Social Security Trust Funds will produce a sizeable increase in overall saving and future income. If the experiences of OECD nation states are treated as a more reliable guide to the U.S. government response to bigger Social Security surpluses, larger pension surpluses will be substantially offset by bigger deficits in other federal accounts, and there will be little net impact on aggregate saving or future national income. We performed a similar review and analysis to assess the impact of faster fund accumulation in private pension accounts. The focus of this evaluation was on the private saving response outside of pensions to faster fund accumulation within a new or revamped private pension system. Our review and statistical analysis show that there is a very large potential for workers to offset faster accumulation in new pension accounts through reduced saving in their non-pension household saving. These empirical findings suggest that the aggregate saving response and future income gains that would follow creation of new private pension accounts will probably be small. The additions to private and aggregate saving will be much smaller than the additions to the new private pension accounts.