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
"President Bush has proposed allowing workers to prefund some Social Security benefits by saving in personal retirement accounts (PRAs)."
President Bush’s push to reform Social Security has many critics. The president has proposed allowing workers to prepay a portion of their retirement benefits with personal retirement accounts (PRAs). He also supports changing the way benefits are calculated in order to restrain their future growth. Some critics of the president’s approach have used findings by Robert Shiller, professor of economics at Yale University, to take issue with a particular feature of Bush-style PRAs called the “benefit offset.” Shiller’s findings have been used to suggest that this provision will cause many workers with PRAs to fare worse than if they had not had these accounts.
This paper examines the critics’ concerns and finds that many of them are addressed by an alternative benefit offset. Shiller noted in his paper that “the 3% real offset rate appears to be too high, and if the program is instituted, it should be done with a lower rate.…Better yet, the offset could be cumulated at a market rate. The offset could be calculated as the terminal value of the contributions brought to the final date using actual U.S. Treasury Inflation Protected Security (TIPS) yields of the appropriate maturity.” In this paper, we do just that by using a benefit offset based on the realized government borrowing rate. With such a rate, most workers with a personal account will retire with higher benefits than they would have without the account.