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The New Social Security Commission Personal Accounts: Where is the Investment Principal?

  • Alan L. Gustman

    (Dartmouth College and NBER)

  • Thomas L. Steinmeier

    (Texas Tech University)

The President’s Commission to Strengthen Social Security suggests three plans for reforming Social Security. These plans divert various amounts of the payroll tax to a personal account if the worker chooses to participate in the account. In return, Social Security benefits are offset using accounts with real returns ranging from 2% to 3.5%. In addition, the second and third plans proposed by the Commission include features that are designed to balance the finances of the system by reducing the rate of growth of benefits relative to the levels prescribed under current law, to make the system more redistributive, and to make other changes. When “personal accounts ” are mentioned, most people think of accounts that are in some sense separate and shielded from the uncertainties of the Social Security system. That is not the case for the personal accounts proposed by the Commission. Because the participating individual is not entitled to the principal in the account, participating in the account does not shield the individual from the political risks of being in the Social Security system. As a result, the reduction in political risk fostered by the Commission’s proposals comes mainly from the improvement in the financial status of the system fostered by other provisions of the recommended plans. Measures to improve the benefits of low-income individuals, widows and widowers and to enhance the rewards to retirement all create incentive effects that are also discussed in the paper.

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Paper provided by University of Michigan, Michigan Retirement Research Center in its series Working Papers with number wp031.

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Length: 19 pages
Date of creation: Jul 2002
Date of revision:
Handle: RePEc:mrr:papers:wp031
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  1. Alan L. Gustman & Thomas L. Steinmeier, 1998. "Privatizing Social Security: First-Round Effects of a Generic, Voluntary, Privatized U.S. Social Security System," NBER Chapters, in: Privatizing Social Security, pages 313-361 National Bureau of Economic Research, Inc.
  2. Jeffrey B. Liebman, 2001. "Redistribution in the Current U.S. Social Security System," NBER Working Papers 8625, National Bureau of Economic Research, Inc.
  3. Julia Lynn Coronado & Don Fullerton & Thomas Glass, 2000. "Long Run Effects of Social Security Reform Proposals on Lifetime Progressivity," NBER Working Papers 7568, National Bureau of Economic Research, Inc.
  4. John Y. Campbell & Martin Feldstein, 2001. "Risk Aspects of Investment-Based Social Security Reform," NBER Books, National Bureau of Economic Research, Inc, number camp01-1, June.
  5. Martin Feldstein & Jeffrey B. Liebman, 2002. "The Distributional Aspects of Social Security and Social Security Reform," NBER Books, National Bureau of Economic Research, Inc, number feld02-1, June.
  6. Laurence J. Kotlikoff & Kent A. Smetters & Jan Walliser, 1998. "Opting Out of Social Security and Adverse Selection," NBER Working Papers 6430, National Bureau of Economic Research, Inc.
  7. Martin Feldstein & Jeffrey B. Liebman, 2001. "Social Security," NBER Working Papers 8451, National Bureau of Economic Research, Inc.
    • 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.
  8. Martin Feldstein & Andrew Samwick, 1996. "The Transition Path in Privatizing Social Security," NBER Working Papers 5761, National Bureau of Economic Research, Inc.
  9. John B. Shoven, 2000. "Administrative Aspects of Investment-Based Social Security Reform," NBER Books, National Bureau of Economic Research, Inc, number shov00-1, June.
  10. Richard Disney & Robert Palacios & Edward Whitehouse, 1999. "Individual choice of pension arrangement as a pension reform strategy," IFS Working Papers W99/18, Institute for Fiscal Studies.
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