TY  - JOUR
AU  - Feldstein,Martin
TI  - Reducing the Risk of Investment-Based Social Security Reform
JF  - National Bureau of Economic Research Working Paper Series
VL  - No. 11084
PY  - 2005
Y2  - January 2005
UR  - http://www.nber.org/papers/w11084
L1  - http://www.nber.org/papers/w11084.pdf
N1  - Author contact info:
Martin S. Feldstein
President Emeritus
NBER
1050 Massachusetts Avenue
Cambridge, MA  02138-5398
Tel: 617/868-3905
Fax: 617/868-7194
E-Mail: msfeldst@nber.org
M1  - published as Martin Feldstein. "Reducing the Risk of Investment-Based Social Security Reform," in Jeffrey Brown, Jeffrey Liebman and David A. Wise, editors, "Social Security Policy in a Changing Environment" University of Chicago Press (2009)

AB  - This paper describes the risks implied by a mixed system of Social Security pension benefits with different combinations of pay-as-you-go taxes and personal retirement account (PRA)  saving.  The analysis shows how these risks can be reduced by using alternative private market guarantee strategies. The first such strategy uses a blend of equities and TIPS to guarantee at least a positive real rate or return on each year's PRA saving. The second is an explicit zero-cost collar that guarantees an annual rate of return by giving up all returns above a certain level. One variant of these guarantees uses a two stage procedure: a guaranteed return to age 66 and then a separate guarantee on the implicit return in the annuity phase.  An alternative strategy provides a combined guarantee on the return during both the accumulation and the annuity phase.
	Simulations are presented of the probability distributions of retirement incomes relative to the "benchmark" benefits specified in current law. Calculations of expected utility show that these risk reduction techniques can raise  expected utility relative to the plans with no guarantees. The ability to do so depends on the individual's risk aversion level.  This underlines the idea that different individuals would rationally prefer different investment strategies and risk reduction options.
ER  -