Financial Engineering and Social Security Reform

Zvi Bodie

in Risk Aspects of Investment-Based Social Security Reform

Published by University of Chicago Press

Published in print December 2000 | ISBN: 9780226092553
Published online February 2013 | e-ISBN: 9780226092560 | DOI:
Financial Engineering and Social Security Reform

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A major concern in the debate about replacing the current social security system in the United States with a system of self-directed personal investment accounts is that ordinary Americans will not be able to cope with the complexities of providing for an adequate income in retirement by investing on their own. This chapter shows how government and private-sector financial institutions can offer people a menu of investment choices that are at least as good as the ones they have now. It first examines the economic theory of optimal lifetime consumption and portfolio selection to see what guidance it offers for the investment of retirement savings. It then demonstrates how to use financial engineering to produce a menu of investment choices defined by a guaranteed minimum level of benefits plus participation in a reference portfolio of stocks. It also considers the role of the government in implementing a system of private investment accounts. Finally, it looks at some of the investment advice offered by investment management firms.

Keywords: social security; financial engineering; personal investment accounts; investment choices; economic theory; retirement savings; stocks; financial institutions

Chapter.  12333 words.  Illustrated.

Subjects: Economic Systems

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