Chapter

Reforming Social Security with Progressive Personal Accounts

Stephen P. Zeldes

Edited by John Geanakoplos

in Social Security Policy in a Changing Environment

Published by University of Chicago Press

Published in print June 2009 | ISBN: 9780226076485
Published online February 2013 | e-ISBN: 9780226076508 | DOI: http://dx.doi.org/10.7208/chicago/9780226076508.003.0004
Reforming Social Security with Progressive Personal Accounts

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This chapter develops yet another approach to Social Security reform. This reform plan is designed to preserve the core objectives of the current Social Security system and, at the same time, gain the benefits of personal accounts. In recent years, the United States has been engaged in a heated debate about whether to replace part of the current, defined benefit (DB) Social Security system with a system of defined contribution (DC) personal accounts. In the current system, the benefits received by Social Security contributors are based on a concave function of lifetime earnings, providing smaller increments in benefits with each additional dollar of lifetime earnings. The importance of making the Social Security system self-balancing by incorporating a market-based aggregate self-correction mechanism is emphasized. The resulting estimates of the “maximum transition cost” measure of system obligations are significantly lower than those of the Social Security Administration, due to the incorporation of market risk into the discounting of future benefits. This chapter demonstrates that it is possible to convert Social Security into a system of personal accounts with irrevocable ownership of market priced assets, while at the same time redistributing benefits based on lifetime income and sharing macroeconomic gains across generations.

Keywords: defined benefit; DB; defined contribution; DC; Social Security; transition cost; personal account

Chapter.  18360 words.  Illustrated.

Subjects: Public Economics

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