Social Security Privatization and Financial Market Risk: Lessons from U.S. Financial History
AbstractA popular proposal for reforming social security is to supplement or replace traditional publicly financed benefits with a new system of mandatory defined-contribution private pensions. Proponents claim that private plans offer better returns than traditional social security. To achieve higher returns, however, contributors are exposed to extra risks associated with financial market fluctuations. This paper offers evidence on the extent of these risks by considering the hypothetical pensions U.S. workers would have obtained between 1911 and 1999 if they had accumulated retirement savings in individual accounts. The 89 hypothetical contributors are assumed to have identical careers and to contribute a fixed percentage of their wages to private investment accounts. Contributors differ only with respect to the stock market returns, bond interest rates, and price inflation they face over their careers. These differences occur because of the differing start and end dates of workers' careers. The analysis demonstrates that returns under private plans would usually have been good, but that financial market risks in a private account system are empirically quite large. Some of these risks are also present in certain types of public retirement system, but a public system has one important advantage over private pensions. Because public social security is backed by the taxing and borrowing authority of the state, it can spread risks over a much larger population of potential contributors and beneficiaries, including contributors and beneficiaries in several generations.
Download InfoIf you experience problems downloading a file, check if you have the proper application to view it first. In case of further problems read the IDEAS help page. Note that these files are not on the IDEAS site. Please be patient as the files may be large.
Bibliographic InfoPaper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 211.
Length: 26 p.
Date of creation: 2000
Date of revision:
Please report citation or reference errors to , or , if you are the registered author of the cited work, log in to your RePEc Author Service profile, click on "citations" and make appropriate adjustments.:
- Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
- Paul A. Samuelson, 1958. "An Exact Consumption-Loan Model of Interest with or without the Social Contrivance of Money," Journal of Political Economy, University of Chicago Press, vol. 66, pages 467.
- Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
- Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, .
"New Evidence on the Money's Worth of Individual Annuities,"
Pension Research Council Working Papers
97-9, Wharton School Pension Research Council, University of Pennsylvania.
- Olivia S. Mitchell, 1999. "New Evidence on the Money's Worth of Individual Annuities," American Economic Review, American Economic Association, vol. 89(5), pages 1299-1318, December.
- Olivia S. Mitchell & James M. Poterba & Mark J. Warshawsky, 1997. "New Evidence on the Money's Worth of Individual Annuities," NBER Working Papers 6002, National Bureau of Economic Research, Inc.
- Gary Burtless, 2001. "The Rationale for Fundamental Pension Reform in Germany and the United States: An Assessment," CESifo Working Paper Series 510, CESifo Group Munich.
- Dirk Krueger & Felix Kubler, 2002. "Intergenerational Risk-Sharing via Social Security when Financial Markets Are Incomplete," American Economic Review, American Economic Association, vol. 92(2), pages 407-410, May.
- Markus M. Grabka & Hanfried H. Andersen & Klaus-Dirk Henke & Katja Borchardt, 2002. "Kapitaldeckung in der Gesetzlichen Krankenversicherung: zur Berechnung der finanziellen Auswirkungen eines Umstiegs vom Umlage auf das Kapitaldeckungssystem," Discussion Papers of DIW Berlin 275, DIW Berlin, German Institute for Economic Research.
- Gollier, Christian, 2007.
"Intergenerational Risk-Sharing and Risk-Taking of a Pension Fund,"
IDEI Working Papers
42, Institut d'Économie Industrielle (IDEI), Toulouse.
- Gollier, Christian, 2008. "Intergenerational risk-sharing and risk-taking of a pension fund," Journal of Public Economics, Elsevier, vol. 92(5-6), pages 1463-1485, June.
- Christian Gollier, 2007. "Intergenerational Risk-Sharing and Risk-Taking of a Pension Fund," CESifo Working Paper Series 1969, CESifo Group Munich.
- Axel Boersch-Supan & Florian Heiss & Alexander Ludwig & Joachim Winter, 2003.
"Pension Reform, Capital Markets and the Rate of Return,"
German Economic Review,
Verein für Socialpolitik, vol. 4(2), pages 151-181, 05.
- Börsch-Supan, Axel H. & Heiss, Florian & Ludwig, Alexander & Winter, Joachim, 2003. "Pension reform, capital markets and the rate of return," Munich Reprints in Economics 20200, University of Munich, Department of Economics.
- Florian Heiss & Alexander Ludwig & Joachim Winter, 2002. "Pension reform, capital markets, and the rate of return," MEA discussion paper series 02023, Munich Center for the Economics of Aging (MEA) at the Max Planck Institute for Social Law and Social Policy.
- Börsch-Supan, Axel & Heiß, Florian & Winter, Joachim, 2000. "Pension reform, capital markets, and the rate of return," Discussion Papers 589, Institut fuer Volkswirtschaftslehre und Statistik, Abteilung fuer Volkswirtschaftslehre.
- Pfau, Wade Donald, 2007. "Reforming Social Security: Issues and Challenges for Personal Retirement Accounts," MPRA Paper 19034, University Library of Munich, Germany.
- Gary Burtless, 2007. "International Investment for Retirement Savers: Historical Evidence on Risk and Returns," Working Papers, Center for Retirement Research at Boston College wp2007-05, Center for Retirement Research, revised Feb 2007.
- Dirk Krueger & Felix Kubler, 2003.
"Pareto Improving Social Security Reform when Financial Markets are Incomplete?,"
NBER Working Papers
9410, National Bureau of Economic Research, Inc.
- Dirk Krueger & Felix Kubler, 2006. "Pareto-Improving Social Security Reform when Financial Markets are Incomplete!?," American Economic Review, American Economic Association, vol. 96(3), pages 737-755, June.
- Krueger, Dirk & Kubler, Felix, 2005. "Pareto improving social security reform when financial markets are incomplete!?," CFS Working Paper Series 2005/12, Center for Financial Studies (CFS).
- Krüger, Dirk & Kubler, Felix, 2005. "Pareto Improving Social Security Reform when Financial Markets Are Incomplete," CEPR Discussion Papers 5039, C.E.P.R. Discussion Papers.
- Robert Holzmann & Richard Hinz, 2005. "Old Age Income Support in the 21st century: An International Perspective on Pension Systems and Reform," World Bank Publications, The World Bank, number 7336, October.
- Gary Burtless, 2006. "Risk and Reward of International Investing for U.S. Retirement Savers: Historical Evidence," Working Papers, Center for Retirement Research at Boston College wp2006-25, Center for Retirement Research, revised Dec 2006.
- Wade D. Pfau & Vararat Atisophon, 2008. "The Impact of the National Pension Fund on the Suitability of Elderly Pensions in Thailand," GRIPS Discussion Papers 08-09, National Graduate Institute for Policy Studies.
- Gary Burtless, 2009.
"Lessons of the Financial Crisis for the Design of National Pension Systems,"
CESifo Working Paper Series
2735, CESifo Group Munich.
- Gary Burtless, 2010. "Lessons of the Financial Crisis for the Design of National Pension Systems," CESifo Economic Studies, CESifo, vol. 56(3), pages 323-349, September.
- Winfried Schmähl, 2000. "Perspektiven der Alterssicherungspolitik in Deutschland -Über Konzeptionen, Vorschläge und einen angestrebten Paradigmenwechsel," Perspektiven der Wirtschaftspolitik, Verein für Socialpolitik, vol. 1(4), pages 407-430, November.
- Wehlau, Diana & Sommer, Jörg, 2004. "Pension policies after EU enlargement: Between financial market integration and sustainability of public finances," Working papers of the ZeS 10/2004, University of Bremen, Centre for Social Policy Research (ZeS).
- Gary Burtless, 2000. "How Would Financial Risk Affect Retirement Income Under Individual Accounts?," Issues in Brief ib-5, Center for Retirement Research.
For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bibliothek).
If references are entirely missing, you can add them using this form.