Reforming Social Security With Progressive Personal Accounts
The Personal Annuitized Average Wage Security [would be] designed to satisfy both those who want a system that redistributes wealth and shares intergenerational risk, and those who want a self-balancing system that encourages individual ownership of retirement benefits that cannot be revoked by a future government.
In Reforming Social Security with Progressive Personal Accounts (NBER Working Paper No. 13979), John Geanakopolos and Stephen Zeldes describe a new type of financial security, the Personal Annuitized Average Wage (PAAW) security, which could play an integral role in future Social Security reforms. The authors observe that some participants in the Social Security policy debate want to retain a defined benefit type of Social Security program, similar to the current system, because they are attracted to its redistributive features and the possibility of intergenerational risk sharing. Other participants in this debate prefer a defined contribution system of personal accounts, with individuals holding marketed assets, because the ready valuation of these accounts facilitates rational retirement planning and because it is difficult for the Government to retract benefit commitments when individuals own the assets in their accounts. The authors suggest that PAAW securities offer a means to secure the objectives of both of these groups. "PAAWs define benefits and achieve risk sharing across generations, yet [they] can be held in personal accounts with market valuations." These securities are thus designed to satisfy both those who want a system that redistributes wealth and shares intergenerational risk, and those who want a self-balancing system that encourages individual ownership of retirement benefits that cannot be revoked by a future government.
A PAAW security would pay its holder one inflation-corrected dollar for every year of life after retirement age, multiplied by the economy-wide average wage at the time he or she retires. The authors suggest that PAAW securities could be issued in exchange for making Social Security tax payments. Individuals with low lifetime income to date could have their tax payments augmented by a government match, while individuals with high lifetime incomes would receive smaller or negative matches. An increase in a worker's relative earnings, and the higher tax payments that go with it, would generate more PAAW securities for this worker's account.
PAAW securities could, in principle, be pooled and then pool shares could be traded in financial markets. For example, every individual could be required to sell a fixed percentage (say 10 percent) of his newly accrued PAAWS into a pool. Limiting individuals to trading a small fraction of their PAAWs would prevent them from putting retirement savings at too great a risk.
Creating a market for PAAWs would deliver a number of benefits that "notional account" Social Security systems do not offer. The market prices for PAAWs would help households to assess the value of retirement benefits earned under social security. Well-defined property rights, combined with a liquid market for PAAWs, would clarify the financial status of the system, making it more difficult for the government to make stealth adjustments in promised payouts and enabling the government to more easily create a self-balancing system. Finally, tradable PAAW securities also might encourage the further development of annuity and reverse mortgage markets.
-- Linda Gorman
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