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Individual Risk In An Investment Based Social Security System
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Book Synopsis Individual Risk in an Investment-based Social Security System by : Martin S. Feldstein
Download or read book Individual Risk in an Investment-based Social Security System written by Martin S. Feldstein and published by . This book was released on 2001 with total page 19 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the risk aspects of an investment-based defined contribution Social Security plan. We focus on the risk after the plan is fully phased in. Individuals deposit a fraction of wages to a Personal Retirement Account (PRA), invest these funds in a 60:40 equity-debt mix, and in a similarly invested annuity at age 67. The value of the assets follows a random walk with mean and variance of a 60:40 equity-debt portfolio over the period 1946-95, a mean log return of 5.5 percent (net of administrative costs of 0.4 percent) and a standard deviation of 12.5 percent. We study he stochastic distributions of this process by doing 10,000 simulations of the 80-year experience of the cohort that reached age 21 in 1998. The resulting annuities are compared to the future defined benefits specified in current law (the benchmark' benefits). With no uncertainty, a 5.5 percent log return would permit the benchmark benefits to be purchased with PRA deposits of 3.1 percent of payroll, only one-sixth of the pay-as-you-go tax needed for the benchmark benefits. Saving a higher share of wages provides a cushion' that protects the individual from the risk of an unacceptably low level of benefits. For example, PRA deposits of 6 percent of wages reduces the probability that the benefits are less than the benchmark to 0.17 and the probability that they are less than 61 percent of the benchmark to 0.05. PRA deposits of 9 percent of wages (half of the tax rate required in a pay-as-you-go system) would substantially reduce these risks. This pure investment-based plan is an extreme case. The investment risk can be reduced further by using a mixed system that combines pay-as-you-go and investment-based components or that makes intergenerational transfers conditional on the performance of stock and bond prices
Book Synopsis Individual Risk in an Ivestment-based Social Security System by : Martin Feldstein
Download or read book Individual Risk in an Ivestment-based Social Security System written by Martin Feldstein and published by . This book was released on 2001 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Individual Risk and Intergenerational Risk Sharing in an Investment-based Social Security System by : Martin S. Feldstein
Download or read book Individual Risk and Intergenerational Risk Sharing in an Investment-based Social Security System written by Martin S. Feldstein and published by . This book was released on 1998 with total page 64 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis Risk Aspects of Investment-Based Social Security Reform by : John Y. Campbell
Download or read book Risk Aspects of Investment-Based Social Security Reform written by John Y. Campbell and published by University of Chicago Press. This book was released on 2009-02-15 with total page 509 pages. Available in PDF, EPUB and Kindle. Book excerpt: Our current social security system operates on a pay-as-you-go basis; benefits are paid almost entirely out of current revenues. As the ratio of retirees to taxpayers increases, concern about the high costs of providing benefits in a pay-as-you-go system has led economists to explore other options. One involves "prefunding," in which a person's withholdings are invested in financial instruments, such as stocks and bonds, the eventual returns from which would fund his or her retirement. The risks such a system would introduce—such as the volatility in the market prices of investment assets—are the focus of this offering from the NBER. Exploring the issues involved in measuring risk and developing models to reflect the risks of various investment-based systems, economists evaluate the magnitude of the risks that both retirees and taxpayers would assume. The insights that emerge show that the risk is actually moderate relative to the improved return, as well as being balanced by the ability of an investment-based system to adapt to differences in individual preferences and conditions.
Book Synopsis Individual Risk and Intergenerational Risk Sharing in an Investment-Based Social Security Program by : Elena Ranguelova
Download or read book Individual Risk and Intergenerational Risk Sharing in an Investment-Based Social Security Program written by Elena Ranguelova and published by . This book was released on 1998 with total page pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper examines the risk aspects of a fully phased-in investment-based defined contribution Social Security plan. Individuals save a fraction of wages in a Personal Retirement Account (PRA) invested in a 60:40 equity-debt mix and receive a similarly invested variable annuity from age 67. The value of the portfolio follows a random walk with historic (1946-1995) mean log real return of 5.5 percent and standard deviation of 12.5 percent. We study 10,000 stochastic distributions of this process for the 80 year experience from 1998 to 2077. With a nonstochastic 5.5 percent rate of return, individuals could purchase the future benefits promised in the current Social Security law (the benchmark' level of benefits) by saving 3.1 percent of earnings, just one-sixth of the payroll tax that Social Security actuaries project will be needed in the paygo system. A higher saving rate provides a cushion' that reduces the risk of unacceptably low benefits. For example, saving 6 percent implies a median annuity at age 67 or 2.1 times the benchmark benefits and only a 17 percent chance that the annuity is less than the benchmark. In 95 percent of the potential investment experience the annuity exceeds 61 percent of the benchmark benefit. With a 9 percent saving rate (half of the tax rate required in a pay- as-you-go system), there is only a 6 percent chance that the annuity is less than the benchmark and in 95 percent of the potential investment experience the annuity exceeds 92 percent of the benchmark benefit. We also study a modified plan in which retirees face no risk of receiveing less than the benchmark benefit because the government provides a conditional pension transfer to any retiree whose annuity is less in any year than the benchmark level of benefits. With a six percent saving rate, a conditional transfer is required in only about 40 percent of the simulations. The expected value of the transfers is substantially less than the expected incremental corporate tax revenue that results from the Per
Book Synopsis The Distributional Effects of an Investment-based Social Security System by : Martin S. Feldstein
Download or read book The Distributional Effects of an Investment-based Social Security System written by Martin S. Feldstein and published by . This book was released on 2000 with total page 94 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we study the distributional impact of a change from the existing pay-as-you-go Social Security system to one that combines both pay-as-you-go and investment-based elements. Critics of investment-based plans have been concerned that such plans might reduce the retirement income of low-paid workers or of surviving spouses relative to what they would get from Social Security, and might therefore increase the extent of poverty among the aged. Our analysis in this paper shows that this is generally not the case, even in plans that make no special effort to maintain or increase redistribution. Our principal finding is that virtually all of the demographic groups that we examine would receive higher average benefits under a mixed system with an investment-based component than the benefits that they would receive under current Social Security rules. There would also be a smaller share of individuals with benefits below the poverty line even though the total cost of funding the mixed system -- a three percent saving contribution rather than a six percent rise in the tax rate -- is substantially lower than that of funding the pay-as-you-go system. Our individual-level data permit us to go beyond comparing group means to analyze the full distribution of the benefits that individuals would receive under the two different systems. These comparisons show that the overwhelming majority of individuals would have higher benefits with the investment-based system than with the pure pay-as-you-go system. The relatively small number of individuals who would receive less from the investment-based system is further reduced when the effects of the Supplementary Security Income program is taken into account. These basic conclusions remain true even if the future rate of return in the investment-based component of the mixed system is substantially less than past experience implies.
Book Synopsis The Distributional Aspects of Social Security and Social Security Reform by : Martin Feldstein
Download or read book The Distributional Aspects of Social Security and Social Security Reform written by Martin Feldstein and published by University of Chicago Press. This book was released on 2007-11-01 with total page 481 pages. Available in PDF, EPUB and Kindle. Book excerpt: Social security is the largest and perhaps the most popular program run by the federal government. Given the projected increase in both individual life expectancy and sheer number of retirees, however, the current system faces an eventual overload. Alternative proposals have emerged, ranging from reductions in future benefits to a rise in taxrevenue to various forms of investment-based personal retirement accounts. As this volume suggests, the distributional consequences of these proposals are substantially different and may disproportionately affect those groups who depend on social security to avoid poverty in old age. Together, these studies persuasively show that appropriately designed investment-based social security reforms can effectively reduce the long-term burden of an aging society on future taxpayers, increase the expected future income of retirees, and mitigate poverty rates among the elderly.
Book Synopsis Social Security and Medicare by : Sheila Burke
Download or read book Social Security and Medicare written by Sheila Burke and published by Brookings Institution Press. This book was released on 2010-12-01 with total page 252 pages. Available in PDF, EPUB and Kindle. Book excerpt: Recent policy debates about the future of Social Security and Medicare have been dominated by the issue of personal versus societal responsibility. Significant changes now being considered would increase the level of privatization and tilt these programs away from defined benefit toward defined contribution models.This annual volume of the National Academy of Social Insurance examines the concept of introducing choice into the Social Security and Medicare programs, how it would be defined and structured, and what sort of safeguards would be needed to protect program participants. The ideas, from representatives of the public and private sectors, range from ¡°tinkering¡± to ¡°overhauling¡± the programs to make them more responsive and cost-effective. The contributors provide an overview of the history and fundamental values of social insurance, discuss options for reforming Social Security and Medicare, review the benefits and drawbacks of expanding choice options, explore the types of mechanisms needed to protect consumers if market-based reforms are adopted, and address the political likelihood of Social Security and Medicare reforms. The essays in this volume give parameters to the debate over the future of Social Security and Medicare, and reflect the range and diversity of views which will shape these two hallmark social insurance programs for decades to come.
Book Synopsis Privatizing Social Security by : Martin Feldstein
Download or read book Privatizing Social Security written by Martin Feldstein and published by University of Chicago Press. This book was released on 2008-04-15 with total page 484 pages. Available in PDF, EPUB and Kindle. Book excerpt: This volume represents the most important work to date on one of the pressing policy issues of the moment: the privatization of social security. Although social security is facing enormous fiscal pressure in the face of an aging population, there has been relatively little published on the fundamentals of essential reform through privatization. Privatizing Social Security fills this void by studying the methods and problems involved in shifting from the current system to one based on mandatory saving in individual accounts. "Timely and important. . . . [Privatizing Social Security] presents a forceful case for a radical shift from the existing unfunded, pay-as-you-go single national program to a mandatory funded program with individual savings accounts. . . . An extensive analysis of how a privatized plan would work in the United States is supplemented with the experiences of five other countries that have privatized plans." —Library Journal "[A] high-powered collection of essays by top experts in the field."—Timothy Taylor, Public Interest
Book Synopsis Potential Paths of Social Security Reform by : Martin S. Feldstein
Download or read book Potential Paths of Social Security Reform written by Martin S. Feldstein and published by . This book was released on 2001 with total page 70 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper presents several alternative Social Security reform options in which the projected level of benefits for every future cohort of retirees is as high or higher than the benefits projected in current law. These future benefits can be achieved without any increase in the payroll tax or in other tax rates. Under each option, the Social Security Trust Fund is solvent and ends with a sustainable positive and growing balance. Each option combines the current pay-as-you-go system of defined benefits with an investment-based personal retirement account (PRA). Assets in the PRA can be bequeathed if the individual dies before normal retirement age. We also consider the option in which an individual can take all or part of his accumulated PRA balanced as a lump sum at normal retirement age. The basic plan that we present in greatest detail combines a transfer to the personal retirement account of a portion of the individual's payroll tax equal to 1.5 percent of earnings if the individual agrees to deposit an equal out-of-pocket amount. The additional national saving that results from this option leads to increased business investment and therefore to increased general tax revenue; a portion of that revenue, equal to 1 percent of the PRA balances, is transferred to the Social Security Trust Fund. The other options that we present include plans with no out-of-pocket contributions by individuals and others with no transfer of general revenue to the Trust Fund. We also discuss the implications of different rates of return on the PRA balances and, more generally, the issue of risk, including a market-based method of guaranteeing the real principal of all PRA deposits.
Book Synopsis Reforming Social Security by : Fred T. Goldberg
Download or read book Reforming Social Security written by Fred T. Goldberg and published by . This book was released on 1999 with total page 54 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper details a method for implementing personal retirement accounts (PRAs) as a part of Social Security reform. The approach described here answers the following questions: how funds are collected and credited to each participants' retirement account; how money is invested; and how funds are distributed to retirees. It is designed to accommodate a variety of answers to a wide range of important policy questions; to minimize administrative costs and distribute those costs in a fair and reasonable way; to minimize the burden on employers, especially small employees who do not now maintain a qualified retirement plan; and to meet the expectations of Americans for simplicity, security, control, and independence in ways that are easy to explain and to understand. The system we describe relies on existing payroll and income tax mechanisms for collecting PRA funds and crediting PRA accounts. It provides two basic options for investments: (i) a simply system involving a limited number of funds sponsored by the Social Security Administration and managed by private companies, and (ii) privately sponsored funds with additional investment choices. It also provides two distribution alternatives if distributions are required to be annuitized: (i) an increase in Social Security benefits, and (ii) inflation-protected annuities provided directly to retirees by private companies.
Book Synopsis Social Security by : Martin S. Feldstein
Download or read book Social Security written by Martin S. Feldstein and published by . This book was released on 2001 with total page 122 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper, a forthcoming chapter in the Handbook of Public Economics, reviews the theoretical and empirical issues dealing with Social Security pensions. The first part of the paper discusses pure pay-as-you-go plans. It considers the effects of introducing such a plan on the present value of consumption, the optimal level of benefits in such plans, and the emprical research on the effects of pay-as-you-go pension systems on labor supply and saving. The second part of the paper discusses the transition to investment-based systems, analyzing the effect on the present value of consumption of such a transition and considering such issues as the distributional effects and risk associated with such systems.
Book Synopsis Accumulated Pension Collars by : Martin S. Feldstein
Download or read book Accumulated Pension Collars written by Martin S. Feldstein and published by . This book was released on 2000 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper shows how a new type of derivative product that could be provided by private financial markets could in principle be used to guarantee that an investment-based Social Security reform provides at least the level of real retirement income that is projected in current Social Security rules. In effect, future retirees could purchase a put option' that guarantees that the future retirement benefit will not fall below the level projected in current Social Security law or some other chosen level. To pay for this guarantee, they would agree to give up the part of the annuity payments which exceeds a given level, effectively selling a call option on the stream of payments. This market-based approach could be completely voluntary, leaving each individual to decide what level of guarantee he wants. The higher the minimum guarantee that the individual chooses, the more of the potentially higher returns he must give up. The financial market can thus tailor each individual's product to his own risk preferences. Alternatively, the government might require that any product that is sold as part of the investment-based Social Security reform must include at least some such market-based guarantee. Our analysis calculates some of the tradeoffs that could be provided in today's financial markets. We show that it is feasible to protect future benefits equal to those projected in current law with a combination of the current payroll tax rate and Personal Retirement Account savings equal to 2.5 percent of covered earnings. Raising the savings rate to 3.0 percent increases substantially the amount of the return that the individual can keep, raising it to 145 percent of the currently projected level of benefits. Reducing the guarantee level to 90 percent of the projected future benefits would increase this upside potential to 150 percent of the currently projected level of benefits with a 2.5 percent saving rate and 195 percent of the currently projected benefits with a 3.0 percent saving rate.
Book Synopsis The Transition to Investment-based Social Security when Portfolio Returns and Capital Profitability are Uncertain by : Martin S. Feldstein
Download or read book The Transition to Investment-based Social Security when Portfolio Returns and Capital Profitability are Uncertain written by Martin S. Feldstein and published by . This book was released on 1999 with total page 80 pages. Available in PDF, EPUB and Kindle. Book excerpt: In this paper we study the transition from a pay-as-you-go system of Social Security pensions to an investment-based system in an economy in which portfolio returns and capital profitability are both uncertain. The paper extends earlier studies by Feldstein and Samwick that modeled the transition process in a nonstochastic environment and by Feldstein and Ranguelova that examined the implication of portfolio risk after the transition to an investment-based system has been completed. We analyze transitions to a mixed system that maintains the current 12.4 percent pay-as-you-go tax rate as well as to a system that is completely investment-based. We model intergenerational guarantees and assess the risk of such guarantees to taxpayers. We find that transitions to either a completely investment-based system or a mixed system that maintains current law benefits can be done with little additional saving in the early years (a maximum of three percent) and substantially lower combinations of taxes and saving deposits in the later years. The extra risk to retirees and/or taxpayers is relatively small, making the investment-based plans preferable to a pure pay-as-you-go system for reasonable degrees of risk aversion.
Book Synopsis Reforming Social Security by : Alicia Haydock Munnell
Download or read book Reforming Social Security written by Alicia Haydock Munnell and published by . This book was released on 1999 with total page 34 pages. Available in PDF, EPUB and Kindle. Book excerpt:
Book Synopsis A New Deal for Social Security by : Peter Ferrara
Download or read book A New Deal for Social Security written by Peter Ferrara and published by . This book was released on 1998 with total page 276 pages. Available in PDF, EPUB and Kindle. Book excerpt: "Ferrara and Tanner offer an alternative - a retirement system based on saving and investment. They propose allowing individuals to divert their Social Security taxes to individually owned, privately invested accounts, similar to IRAs or 401(k) plans. Answering the hard, practical questions about privatizing Social Security, the authors show how such a plan would provide higher and more secure retirement benefits without increasing taxes or penalizing today's retirees."--BOOK JACKET.
Book Synopsis Changing Progressivity as a Means of Risk Protection in Investment-based Social Security by : Andrew Samwick
Download or read book Changing Progressivity as a Means of Risk Protection in Investment-based Social Security written by Andrew Samwick and published by . This book was released on 2007 with total page 45 pages. Available in PDF, EPUB and Kindle. Book excerpt: This paper analyzes changes in the progressivity of the Social Security benefit formula as a means of lessening the risk inherent in investment-based Social Security reform. Focusing on a single cohort of workers, it simulates the distribution of benefits subject to both earnings and financial risks in a reformed system in which solvency has been restored and traditional benefits have been augmented by personal retirement accounts (PRAs). The simulations show that some investment in equities is desirable in all cases. However, switching from the current benefit formula to the maximally progressive formula -- a flat benefit independent of earnings -- improves the welfare of the the bottom 30 percent of the earnings distribution even if they reduce their PRA investments in equity to zero. An additional 30 percent of earners can lessen their equity investments without loss of welfare under the maximally progressive formula. Intermediate approaches in which traditional benefit replacement rates for lower earnings are reduced by less than those for higher earnings allow about half of the equity risk to be eliminated for the lowest earnings decile. Sensitivity tests show that these patterns are robust to different assumptions about risk aversion, the equity premium, and the size of the personal retirement accounts established by the reform.
