REFORMING SOCIAL SECURITY WITH PROGRESSIVE PERSONAL ACCOUNTS
January 5, 2009
In an NBER working paper, co-authors John Geanakopolos and Stephen Zeldes describe a new type of financial instrument, the Personal Annuitized Average Wage (PAAW) security, which could play an integral role in future Social Security reforms.
The authors observe that some participants in the Social Security policy debate want to retain a defined benefit type of Social Security program, similar to the current system. Others prefer a defined contribution system of personal accounts, with individuals holding market assets. The authors suggest that PAAW securities offer a means to secure the objectives of both of these groups:
- A PAAW security would pay its owner one inflation-corrected dollar during every year of life after his statutory retirement date, multiplied by the economy wide average wage at the retirement date.
- PAAW securities could be issued in exchange for Social Security tax payments.
- Individuals with low lifetime wage income would have their tax payments augmented by a government match, while individuals with high lifetime incomes would receive smaller or negative matches.
- An increase in a worker's relative earnings, and the higher tax payments that go with it, would generate more PAAW securities for this worker's account.
PAAW securities could, in principle, be pooled and then pool shares could be traded in financial markets. For example, every individual could be required to sell a fixed percentage (say 10 percent) of his newly accrued PAAWS into a pool. Creating a market for PAAWS would deliver a number of benefits that "notional account" Social Security systems do not offer.
Source: Linda Gorman, "Reforming Social Security with Progressive Personal Accounts," NBER Digest, October 2008, and John Geanakoplos and Stephen P. Zeldes, "Reforming Social Security with Progressive Personal Accounts," National Bureau of Economic Research, Working Paper 13979, April 2008.
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