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Guaranteeing Individual Accounts

  • Marie-Eve Lachance
  • Olivia S. Mitchell

Global aging is prompting workers and taxpayers everywhere to recognize their vulnerability to the inherent uncertainty of unfunded social-security systems. This has generated an international wave of social-security reforms over the last two decades, prompting more than 20 countries to establish Individual Account (IA) plans. In the United States, the idea of Individual Accounts has attracted recent interest with the release of the Final Report of the President's Commission to Strengthen Social Security (CSSS): here, voluntary individual accounts were proposed as a key element of a reformed national old-age system (see Commission to Strengthen Social Security, 2001; John F. Cogan and Mitchell, 2003). Strengths of IA's include the fact that participants gain ownership in their accounts and diversify their pension investments; nevertheless, IA participants also must bear capital-market risk. Recent market volatility has reminded investors of the importance of capital-market fluctuations and their potential impact on retirement income. In response, some policymakers have suggested that "guarantees" be designed to help protect IA investments. Abroad, such guarantees have been adopted in several Latin American countries undergoing reform, and most recently, in Japan and Germany (Mitchell and Kent Smetters, 2003). Sensible public policy recommending the adoption of guarantees must identify their costs and who will pay for them. In this paper, we discuss how to evaluate such costs in the context of a social-security reform that includes IA's, along with ways to finance them.

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Article provided by American Economic Association in its journal American Economic Review.

Volume (Year): 93 (2003)
Issue (Month): 2 (May)
Pages: 257-260

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Handle: RePEc:aea:aecrev:v:93:y:2003:i:2:p:257-260
Note: DOI: 10.1257/000282803321947155
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  1. Martin Feldstein & Elena Ranguelova, 2001. "Accumulated Pension Collars: A Market Approach to Reducing the Risk of Investment-Based Social Security Reform," NBER Chapters, in: Tax Policy and the Economy, Volume 15, pages 149-166 National Bureau of Economic Research, Inc.
  2. Smetters, Kent, 2002. "Controlling the cost of minimum benefit guarantees in public pension conversions," Journal of Pension Economics and Finance, Cambridge University Press, vol. 1(01), pages 9-33, March.
  3. Feldstein, Martin & Liebman, Jeffrey B., 2002. "Social security," Handbook of Public Economics, in: A. J. Auerbach & M. Feldstein (ed.), Handbook of Public Economics, edition 1, volume 4, chapter 32, pages 2245-2324 Elsevier.
  4. Marie-Eve Lachance & Olivia S. Mitchell, 2003. "Understanding Individual Account Guarantees," Working Papers wp035, University of Michigan, Michigan Retirement Research Center.
  5. John F. Cogan & Olivia S. Mitchell, 2003. "Perspectives from the President's Commission on Social Security Reform," Journal of Economic Perspectives, American Economic Association, vol. 17(2), pages 149-172, Spring.
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