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How Much Risk is Acceptable?

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  • Alicia H. Munnell
  • Anthony Webb
  • Alex Golub-Sass

Abstract

The financial crisis has sparked proposals to reform the retirement income system. One component of such a system could be a new tier of retirement accounts. These accounts would augment declining Social Security replacement rates for low-wage workers and provide a buffer of security for middle- and upper-wage workers who, increasingly, will rely totally on 401(k) plans to supplement their Social Security. Designing such a new tier requires answering a number of questions: Mandatory or voluntary? Employee and/or employer contributions? Subsidies for low earners? Payments as lump sums or annuities? Tax favored or not? But the most fundamental question is whether the goal of the new tier is to provide a defined contribution account, where the retirement income will depend on market performance, or an account that can provide a certain percent of final earnings ñ that is, a target replacement rate...

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Bibliographic Info

Paper provided by Center for Retirement Research in its series Issues in Brief with number ib2008-8-20.

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Length: 9 pages
Date of creation: Nov 2008
Date of revision: Nov 2008
Handle: RePEc:crr:issbrf:ib2008-8-20

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References

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  1. John Karl Scholz & Ananth Seshadri & Surachai Khitatrakun, 2006. "Are Americans Saving "Optimally" for Retirement?," Journal of Political Economy, University of Chicago Press, University of Chicago Press, vol. 114(4), pages 607-643, August.
  2. Gary Burtless, 2000. "How Would Financial Risk Affect Retirement Income Under Individual Accounts?," Issues in Brief, Center for Retirement Research ib-5, Center for Retirement Research.
  3. repec:crr:issbrf:ib41 is not listed on IDEAS
  4. Olivia S. Mitchell, 1999. "New Evidence on the Money's Worth of Individual Annuities," American Economic Review, American Economic Association, American Economic Association, vol. 89(5), pages 1299-1318, December.
  5. repec:crr:issbrf:ib2007-7-11 is not listed on IDEAS
  6. Alicia H. Munnell, 2003. "The Declining Role Of Social Security," Just the Facts, Center for Retirement Research jtf-6, Center for Retirement Research.
  7. Alicia H. Munnell & Dan Muldoon, 2008. "Are Retirement Savings Too Exposed to Market Risk?," Issues in Brief, Center for Retirement Research ib2008-8-16, Center for Retirement Research, revised Oct 2008.
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Cited by:
  1. Dorfman, Mark & Hinz, Richard & Robalino, David, 2008. "The Financial Crisis and Mandatory Pension Systems in Developing Countries: Short- and Medium-term Responses," MPRA Paper 12254, University Library of Munich, Germany, revised Dec 2008.
  2. Alicia H. Munnell & Alex Golub-Sass & Richard W. Kopcke & Anthony Webb, 2009. "What Does It Cost To Guarantee Returns?," Issues in Brief, Center for Retirement Research ib2009-9-4, Center for Retirement Research, revised Feb 2009.

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