Social Security, Privatization and Risk
I admit it, I have shamelessly stolen this from Victor at Dead Parrots Society. But it is a good find and should get more attention than it is getting. The issue is the risk that will come with implementing Model 2 of President Bush’s plan to reform Social Security. Martin Feldstein, a long time advocate of privatization and someone usually thought of as being conservative has the following to say,
The issue of asset price risk is more complex. On the basis of a substantial amount of research, I believe that a suitable mixed system that combines tax-financed pay-as-you-go benefits with investment-based PRA annuities can satisfy three conditions: a substantially lower long-term cost of financing retirement income than the tax projected for the pay-as-you-go system; a higher expected level of benefits from the combination of pay-as-you-go and the PRA annuities; and a very low probability that the actual level of combined benefits will be less than the pay-as-you-go benefits projected in current law. The low risk could be achieved by a combination of three things: the floor on retirement income provided by the pay-as-you-go benefits in the mixed system, restrictions on the investments that can be made in the PRAs, and explicit guarantees provided by either the government or the private market. Because individuals differ in their risk preferences, the solution that can best reflect those different preferences may be the availability of a variety of alternative guarantees from the private organizations that manage the PRAs and PRA annuities.–bold added (link)
See also Victor’s other post on this issue where he looks at how much a person would recieve based on when they retired and what options they took. It still doesn’t get to the issue of risk, but keep watching Dead Parrots Society and hopefully Victor will do some more work on this.