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Social Security Personal-Account Participation with Government Matching

  • Gary V. Engelhardt

    ()

    (Syracuse University)

  • Anil Kumar

    ()

    (Center for Policy Research)

This paper examines the potential impact of government matching contributions on personal-account participation in the President's Commission on Strengthening Social Security's Model 3 for Social Security reform. Given the government's choice of four plan-design parameters, the magnitude of the match is determined solely by the differential return personal-account assets receive above the notional return, referred to as the "personal-account premium," akin to the equity premium. The impact of matching on personal-account participation is simulated for older workers (ages 40 to 65) in the first wave of the Health and Retirement Study (HRS) using empirical estimates from a structural model of the impact of employer matching on participation in corporate 401(k) plans. For a personal-account premium of five percentage points, which implies a match rate of 12.5 percent for middle- to lower-income workers, the simulations imply that 53 percent of older workers would participate in voluntary personal accounts. The response of participation to matching is very inelastic; it is very unlikely that participation by older workers would achieve the mid-range assumption by the Commission of 67 percent. There is substantial heterogeneity in participation across subsets of older workers: participation would be the lowest for low-educated, minority, and unmarried older workers.

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File URL: http://crr.bc.edu/working-papers/social-security-personal-account-participation-with-government-matching/
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Paper provided by Center for Retirement Research in its series Working Papers, Center for Retirement Research at Boston College with number 2004-22.

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Length: 48 pages
Date of creation: Oct 2004
Date of revision:
Handle: RePEc:crr:crrwps:2004-22
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