Social Security Reform: Responding to the Critics

Policy Reports | Social Security

No. 281
Wednesday, November 16, 2005
by Andrew J. Rettenmaier and Zijun Wang

Flexible Annuitization Rules

PRA holders will likely be required to purchase an annuity with their account balance at retirement. The annuity will provide a monthly benefit payment for life that would be combined with the price-indexed benefit the worker receives from the traditional taxpayer-funded Social Security system.

"Workers could gradually purchase retirement annuities with their PRAs."

Features can be built into the system to help retirees avoid annuitizing their entire account accumulation at the bottom of a down market. For example, workers could annuitize their personal account benefit over several years. Laurence Kotlikoff has suggested gradually annuitizing each worker’s personal account between the ages of 57 and 67. 16 Coupling the gradual sale of personal account assets with a benefit offset threshold that is adjusted throughout the process would reduce the frequency of failures.

Another way would be to allow workers with accounts large enough to provide a specified minimum benefit (when combined with their benefits from the traditional Social Security system) to annuitize their accounts at any time, as is the case in Chile. 17

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