Issues in Privatizing Social Security

Issues in Privatizing Social Security

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.

Panel on Privatization of Social Security 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 1.2	Social Security Finances 39 Increased Advance Funding and National Savings 42
	Question 2: Investment Policy 47
	2.1 2.2 2.3 2.4 2.5	Individual Portfolio Choice and Returns 47 Risks and Returns with Trust Fund Investment in Stocks and Corporate Bonds 50 Money's Worth and Investment in Stocks 52 Effects on the Aggregate Economy of Trust Fund 54 Structural and Political Issues Associated with Private Investment 58
	Question 3: Individual Accounts vs. Single Collective Fund 67
	3.1 3.2 3.3 3.4 3.5 3.6 3.7	Administrative Structure and Costs 67 An Illustrative Low-Cost/Low-Service Plan 75 Economics of Accumulation 83 Benefit Structure 90 Individual Values 96 Political Concerns 97 Recapping 108
	Question 4: Issues of Choice 111
	4.1 4.2 4.3	Choice in Investment Options 111 Choice of Annuitization 114 Voluntary Individual Accounts 119
	Question 5: Private vs. Government Collection, Management, and Distribution 123
	5.1 5.2 5.3	Collection 123 Organization of Accounts 127 Annuitization 134
	Conclusion 137
	Glossary 141 Notes 151 References 159 Appendixes A and B 163