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Social Security Privatization and Financial Market Risk: Lessons from U.S. Financial History

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Author Info
Gary Burtless

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Abstract

A 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.

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File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.38569.de/dp211.pdf
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Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 211.

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Length: 26 p.
Date of creation: 2000
Date of revision:
Handle: RePEc:diw:diwwpp:dp211

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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.:

  1. J. E. King, 1999. "Introduction," Review of Political Economy, Taylor and Francis Journals, vol. 11(3), pages 251-255, July. [Downloadable!] (restricted)
  2. 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. [Downloadable!] (restricted)
  3. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March. [Downloadable!]
  4. J. Schuster, 1999. "Introduction," Journal of Cultural Economics, Springer, vol. 23(1), pages 1-2, March. [Downloadable!] (restricted)
  5. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc. [Downloadable!] (restricted)
  6. 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.
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(explanations, 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.)

  1. Gary Burtless, 2003. "How Would Financial Risk Affect Retirement Income Under Individual Accounts?," Issues in Brief ib-5, Center for Retirement Research. [Downloadable!]
  2. 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. [Downloadable!]
  3. 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. [Downloadable!]
  4. 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. [Downloadable!]
  5. Christian Gollier, 2007. "Intergenerational Risk-Sharing and Risk-Taking of a Pension Fund," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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  6. Barry Bosworth & Gary Burtless, 2002. "Pension Reform in the Presence of Financial Market Risk," Working Papers, Center for Retirement Research at Boston College 2002-01, Center for Retirement Research. [Downloadable!]
  7. 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. [Downloadable!]
  8. Barry Bosworth & Gary Burtless & Benjamin Keys, 2003. "Young Widow(er)s, Social Security, And Marriage," Working Papers, Center for Retirement Research at Boston College 2003-03, Center for Retirement Research. [Downloadable!]
  9. 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. [Downloadable!]
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  10. Gary Burtless, 2009. "Lessons of the Financial Crisis for the Design of National Pension Systems," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
  11. Gary Burtless, 2001. "The Rationale for Fundamental Pension Reform in Germany and the United States: An Assessment," CESifo Working Paper Series CESifo Working Paper No. , CESifo Group Munich. [Downloadable!]
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