IDEAS home Printed from https://ideas.repec.org/
MyIDEAS: Login to save this paper or follow this series

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

  • Gary Burtless

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.

If 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.

File URL: http://www.diw.de/documents/publikationen/73/diw_01.c.38569.de/dp211.pdf
Download Restriction: no

Paper provided by DIW Berlin, German Institute for Economic Research in its series Discussion Papers of DIW Berlin with number 211.

as
in new window

Length: 26 p.
Date of creation: 2000
Date of revision:
Handle: RePEc:diw:diwwpp:dp211
Contact details of provider: Postal: Mohrenstraße 58, D-10117 Berlin
Phone: xx49-30-89789-0
Fax: xx49-30-89789-200
Web page: http://www.diw.de/en
Email:


More information through EDIRC

References listed on IDEAS
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.:

as in new window
  1. 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.
  2. Peter Diamond, 2004. "Social Security," American Economic Review, American Economic Association, vol. 94(1), pages 1-24, March.
  3. 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.
  4. Courtney Coile & Jonathan Gruber, 2000. "Social Security and Retirement," NBER Working Papers 7830, National Bureau of Economic Research, Inc.
Full references (including those not matched with items on IDEAS)

This item is not listed on Wikipedia, on a reading list or among the top items on IDEAS.

When requesting a correction, please mention this item's handle: RePEc:diw:diwwpp:dp211. See general information about how to correct material in RePEc.

For technical questions regarding this item, or to correct its authors, title, abstract, bibliographic or download information, contact: (Bibliothek)

If you have authored this item and are not yet registered with RePEc, we encourage you to do it here. This allows to link your profile to this item. It also allows you to accept potential citations to this item that we are uncertain about.

If references are entirely missing, you can add them using this form.

If the full references list an item that is present in RePEc, but the system did not link to it, you can help with this form.

If you know of missing items citing this one, you can help us creating those links by adding the relevant references in the same way as above, for each refering item. If you are a registered author of this item, you may also want to check the "citations" tab in your profile, as there may be some citations waiting for confirmation.

Please note that corrections may take a couple of weeks to filter through the various RePEc services.

This information is provided to you by IDEAS at the Research Division of the Federal Reserve Bank of St. Louis using RePEc data.