Issues in Privatizing Social Security: Report of an Expert Panel of the National Academy of Social Insurance
Type
Two types of changes to Social Security have been proposed. One would keep the current defined-benefit structure but build and maintain a larger trust fund, to be partially invested in stocks and corporate bonds. The other would set up individual funded accounts, also to be partially invested in private markets. Both would raise taxes or lower benefits in the near term to increase funds for paying future benefits.This study addresses many important aspects of these politically charged proposals. The questions discussed include: Should Social Security have more advance funding? Should Social Security funds be invested in the stock market? If investments are organized by the government, what independent institutions would shield portfolio decisions and corporate governance from political pressures? If investments are privately organized, what would be the regulatory structure? Finally, should Social Security include individual defined-contribution accounts or stay with traditional defined benefits?The National Academy of Social Insurance is a nonprofit, nonpartisan organization whose mission is to conduct research on and enhance public understanding of social insurance, to develop new leaders, and to provide a forum for the exchange of ideas on issues related to social insurance.
Peter A. Diamond, Chair
Massachusetts Institute of Technology
R. Douglas Arnold
Princeton University
B. Douglas Bernheim
Stanford University
Gary Burtless
The Brookings Institution
Yuan Chang
Metropolitican Life Insurance Company
Mary C.Daly
Federal Reserve Bank of San Francisco
John Geanakoplos
Yale University
Stephen C. Goss
Social Security Administration
Daniel Halperin
Harvard Law School
Hugh Heclo
George Mason University
Thomas Jones
Solomon Smith Barney Asset Management
Ian D. Lanoff
Groom Law Group
Frank Levy
Massachusetts Institute of Technology
Dallas L. Salisbury
Employee Benefit Research Institute
Allen Schick
University of Maryland - College Park
Stephen P. Zeldes
Columbia University
Table of Contents
Preface / xv
Executive Summary / 1
Introduction / 33
Background / 33
Report Scope and Organization 37
Question 1: Advance Funding vs. Pay-As-You-Go / 39
1.1 Social Security Finances / 39
1.2 Increased Advance Funding and National Savings / 42
Question 2: Investment Policy / 47
2.1 Individual Portfolio Choice and Returns / 47
2.2 Risks and Returns with Trust Fund Investment in Stocks and Corporate Bonds / 50
2.3 Money's Worth and Investment in Stocks / 52
2.4 Effects on the Aggregate Economy of Trust Fund / 54
2.5 Structural and Political Issues Associated with Private Investment / 58
Question 3: Individual Accounts vs. Single Collective Fund / 67
3.1 Administrative Structure and Costs / 67
3.2 An Illustrative Low-Cost/Low-Service Plan / 75
3.3 Economics of Accumulation / 83
3.4 Benefit Structure / 90
3.5 Individual Values / 96
3.6 Political Concerns / 97
3.7 Recapping / 108
Question 4: Issues of Choice / 111
4.1 Choice in Investment Options / 111
4.2 Choice of Annuitization / 114
4.3 Voluntary Individual Accounts / 119
Question 5: Private vs. Government Collection, Management, and Distribution / 123
5.1 Collection / 123
5.2 Organization of Accounts / 127
5.3 Annuitization / 134
Conclusion / 137
Glossary / 141
Notes / 151
References / 159
Appendixes A and B / 163