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Reforming Social Security with Progressive Personal Accounts

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  • John Geanakoplos
  • Stephen P Zeldes

Abstract

The heated debate about how to reform Social Security has come to a standstill because the view of most Democrats (that Social Security must be a defined benefits plan similar in spirit to the current system) seems irreconcilable with the proposals supported by many Republicans (to create a defined contribution system of personal accounts holding marketed assets). We describe a system of "progressive personal accounts" that preserves the core goals of both parties, and that is self-balancing on an ongoing basis. Progressive personal accounts have two critical features: (1) accruals into the personal accounts would be exclusively in a new kind of derivative security (which we call a PAAW for Personal Annuitized Average Wage security) that pays its owner one inflation-corrected dollar during every year of life after his statutory retirement date, multiplied by the economy wide average wage at the retirement date and (2) households would buy their new PAAWs each year with their social security contributions, augmented or reduced by a government match that would add to contributions from households with low lifetime incomes by taking from households with high lifetime incomes. PAAWS define benefits and achieve risk sharing across generations, as Democrats would like, yet can be held in personal accounts with market valuations, as Republicans propose.
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  • John Geanakoplos & Stephen P Zeldes, 2008. "Reforming Social Security with Progressive Personal Accounts," Levine's Working Paper Archive 122247000000002230, David K. Levine.
    • Handle: RePEc:cla:levarc:122247000000002230
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    References listed on IDEAS

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    Cited by:

    1. Le Blanc, Julia & Scholl, Almuth, 2011. "Optimal savings for retirement: The role of individual accounts and disaster expectations," Discussion Paper Series 1: Economic Studies 2011,33, Deutsche Bundesbank.
    2. Vicki L. Bogan & Angela R. Fertig, 2018. "Mental health and retirement savings: Confounding issues with compounding interest," Health Economics, John Wiley & Sons, Ltd., vol. 27(2), pages 404-425, February.
    3. Luca Benzoni & Olena Chyruk, 2013. "Human Capital and Long-Run Labor Income Risk," Working Paper Series WP-2013-16, Federal Reserve Bank of Chicago.
    4. John Geanokoplos & Stephen P. Zeldes, 2010. "Market Valuation of Accrued Social Security Benefits," NBER Chapters, in: Measuring and Managing Federal Financial Risk, pages 213-233, National Bureau of Economic Research, Inc.
    5. Alexander Ludwig & Thomas Schelkle & Edgar Vogel, 2012. "Demographic Change, Human Capital and Welfare," Review of Economic Dynamics, Elsevier for the Society for Economic Dynamics, vol. 15(1), pages 94-107, January.
    6. repec:clr:wugarc:y:2016v:42i:03p:465 is not listed on IDEAS
    7. Erzo F. P. Luttmer & Andrew A. Samwick, 2018. "The Welfare Cost of Perceived Policy Uncertainty: Evidence from Social Security," American Economic Review, American Economic Association, vol. 108(2), pages 275-307, February.
    8. Luca Benzoni & Olena Chyruk, 2009. "Investing over the life cycle with long-run labor income risk," Economic Perspectives, Federal Reserve Bank of Chicago, vol. 33(Q III), pages 29-43.
    9. Markus Knell, 2016. "Grundlagen eines soliden und solidarischen Pensionskontensystems," Wirtschaft und Gesellschaft - WuG, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik, vol. 42(3), pages 465-495.
    10. Hans Fehr & Fabian Kindermann, 2010. "Pension Funding and Individual Accounts in Economies with Life-cyclers and Myopes," CESifo Economic Studies, CESifo, vol. 56(3), pages 404-443, September.
    11. Alessandro Bucciol & Roel M.W.J. Beetsma, 2010. "Inter- and Intra-generational Consequences of Pension Buffer Policy under Demographic, Financial, and Economic Shocks," CESifo Economic Studies, CESifo, vol. 56(3), pages 366-403, September.
    12. Hans Fehr & Fabian Kindermann, 2010. "Pension Funding and Individual Accounts in Economies with Life-cyclers and Myopes," CESifo Economic Studies, CESifo Group, vol. 56(3), pages 404-443, September.
    13. Le Blanc, Julia & Scholl, Almuth, 2017. "Optimal Savings For Retirement: The Role Of Individual Accounts," Macroeconomic Dynamics, Cambridge University Press, vol. 21(6), pages 1361-1388, September.
    14. Markus Knell & Reinhard Koman, 2022. "Pension Entitlements and Net Wealth in Austria (Markus Knell, Reinhard Koman)," Working Papers 238, Oesterreichische Nationalbank (Austrian Central Bank).
    15. No authors listed, 2016. "Überlegungen zur fairen und nachhaltigen Ausgestaltung eines Pensionskontensystems," Working Paper Reihe der AK Wien - Materialien zu Wirtschaft und Gesellschaft 159, Kammer für Arbeiter und Angestellte für Wien, Abteilung Wirtschaftswissenschaft und Statistik.

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    More about this item

    JEL classification:

    • E6 - Macroeconomics and Monetary Economics - - Macroeconomic Policy, Macroeconomic Aspects of Public Finance, and General Outlook
    • H55 - Public Economics - - National Government Expenditures and Related Policies - - - Social Security and Public Pensions
    • D91 - Microeconomics - - Micro-Based Behavioral Economics - - - Role and Effects of Psychological, Emotional, Social, and Cognitive Factors on Decision Making

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