Social Security Reform: Responding to the Critics
Wednesday, November 16, 2005
by Andrew J. Rettenmaier and Zijun Wang
Table of Contents
- Executive Summary
- Social Security Reform
- Evaluating the President's Approach
- Examining the Options
- Results Using Historical Data
- Results Using Adjusted Historical Data
- Results Based on Simulated Data
- Protection against Downside Risk
- Flexible Annuitization Rules
- Summary and Conclusions
- Appendix: Basic Assumptions and Additional Findings
- About the Authors
Summary and Conclusions
As this paper demonstrates, a benefit offset rate that tracks the realized rate of return on government bonds, rather than being set at a static rate, will increase the likelihood that workers’ returns on their personal retirement accounts will outpace the benefit offset.
"Using the realized government borrowing rate is in the spirit of the rationale for the benefit offset."
This paper addresses the frequency with which PRA accumulations fall short of those that would result from investing in a pure government bond account which represents the benefit offset amount. We follow Shiller’s recommendation that the benefit offset rate be computed using a market rate of return rather than a fixed 3 percent return. 18 Our treatment using the realized government borrowing rate is in the spirit of the rationale for the benefit offset, which is to repay the government for the loan provided to workers. We also report on a more aggressive life-cycle investment strategy and provide estimates based on simulated data.
In contrast to Shiller’s findings we find that:
- None of the portfolios which include equities fall short of the benefit offset amount when we use unadjusted historical data, and thus provide net benefits to retirees.
- Even when the historical stock returns are adjusted downward by reducing the average return to 4.8 percent, reflecting a substantial decline in the equity premium, we find that at most, 7.7 percent of the 91 overlapping historical time periods would produce negative net benefits.
NOTE: Nothing written here should be construed as necessarily reflecting the views of the National Center for Policy Analysis or as an attempt to aid or hinder the passage of any bill before Congress.