Chapter

Reducing the Risk of Investment-Based Social Security Reform

Edited by Martin Feldstein

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/9780226076508.003.0007
Reducing the Risk of Investment-Based Social Security Reform

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This chapter presents a new market-based approach to reducing the risk of investment-based Social Security that could be tailored to individual risk preferences. With this new form of risk reduction, substituting an investment-based personal retirement account (PRA) for the traditional pure PAYGO plan could achieve both a significantly higher expected retirement income and a very high probability that the investment-based annuity would be at least as large as the PAYGO benefit. Simulations are used to derive the probability distributions of retirement incomes relative to the “benchmark” benefits specified in current law. The calculations of the expected utility imply that these risk reduction techniques can raise the expected utility relative to plans with no guarantee. The ability to do so depends on the individual's risk aversion level.

Keywords: personal retirement plan; PRA; Social Security; simulations; risk reduction

Chapter.  12336 words. 

Subjects: Public Economics

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