NATIONAL BUREAU OF ECONOMIC RESEARCH
NATIONAL BUREAU OF ECONOMIC RESEARCH

The Life-Cycle Personal Accounts Proposal for Social Security: A Review

Robert J. Shiller

NBER Working Paper No. 11300
Issued in May 2005
NBER Program(s):Aging, Economic Fluctuations and Growth, Public Economics

The life-cycle accounts proposal for Social Security reform has been justified by its proponents using a number of different arguments, but these arguments generally involve the assumption of a high likelihood of good returns on the accounts. A simulation is undertaken to estimate the probability distribution of returns in the accounts based on long-term historical experience. U.S. stock market, bond market and money market data 1871-2004 are used for the analysis. Assuming that future returns behave like historical data, it is found that a baseline personal account portfolio after offset will be negative 32% of the time on the retirement date. The median internal rate of return in this case is 3.4 percent, just above the amount necessary for holders of the accounts to break even. However, the U.S. stock market has been unusually successful historically by world standards. It would be better if we adjust the historical data to reduce the assumed average stock market return for the simulation. When this is done so that the return matches the median stock market return of 15 countries 1900-2000 as reported by Dimson et al. [2002], the baseline personal account is found to be negative 71% of the time on the date of retirement and the median internal rate of return is 2.6 percent.

download in pdf format
   (180 K)

email paper

The NBER Bulletin on Aging and Health provides summaries of publications like this.  You can sign up to receive the NBER Bulletin on Aging and Health by email.

Machine-readable bibliographic record - MARC, RIS, BibTeX

Document Object Identifier (DOI): 10.3386/w11300

Published: Shiller, Robert J. "Life-Cycle Personal Accounts Proposal For Social Security: An Evaluation Of President Bush's Proposal," Journal of Policy Modeling, 2006, v28(4,May), 427-444.

Users who downloaded this paper also downloaded* these:
Poterba, Rauh, Venti, and Wise w11974 Lifecycle Asset Allocation Strategies and the Distribution of 401(k) Retirement Wealth
Aggarwal, Erel, Stulz, and Williamson w12819 Do U.S. Firms Have the Best Corporate Governance? A Cross-Country Examination of the Relation between Corporate Governance and Shareholder Wealth
Campbell, Cocco, Gomes, and Maenhout Investing Retirement Wealth: A Life-Cycle Model
Shiller w13962 Derivatives Markets for Home Prices
Duggan and Scott Morton w13917 The Effect of Medicare Part D on Pharmaceutical Prices and Utilization
 
Publications
Activities
Meetings
NBER Videos
Themes
Data
People
About

National Bureau of Economic Research, 1050 Massachusetts Ave., Cambridge, MA 02138; 617-868-3900; email: info@nber.org

Contact Us