NCPA - National Center for Policy Analysis

Sharing Social Security Risk

April 10, 2003

The risk of unemployment or declining home values, wages or could be shared through insurance, says Yale University economist Robert J. Shiller in his new book, "The New Financial Order" (Princeton University Press, 2003).

Shiller is well known for his previous book "Irrational Exuberance," which forecast the demise of the 1990's bull market.

Similarly, Shiller offers a novel idea for risk sharing in Social Security programs. Most countries -- including the United States -- now offer retirees monthly payments based on lifetime income, age at retirement and the inflation rate; these payments, in turn, come from a payroll tax on the employed.

Retirees get a fixed, inflation-adjusted payment, while workers bear all the risk of fluctuations in nominal income.

Suppose that, instead of receiving a fixed amount taken from workers' paychecks, Social Security recipients received a fixed share of those paychecks -- that is, wage income --where the share was determined by the fraction of the population that was retired (now about 11 percent).

  • The risk of fluctuations in nominal labor income would then be shared between workers and retirees.
  • Those who preferred not to bear such risks, whether they were retired or working, could sell off some of that risk using other insurance markets.

Social Security would be in a much better position today if the system had been set up with intergenerational risk sharing, says economist Hal R. Varian.

But Shiller's proposal faces the same problem all Social Security reforms face: How do we get from here to there?

Source: Hal R. Varian, "Novel Ideas for a Risky World," Economic Scene, New York Times, April 10, 2003.

 

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