Made Poorer by Choice: Worker Outcomes in Social Security vs. Private Retirement Accounts
Board of Governors of the Federal Reserve System
Brad M. Barber
University of California, Davis
University of California, Berkeley - Haas School of Business
February 15, 2013
Can the freedom to choose how retirement funds are invested leave workers worse off? We analyze social risks of allowing choice, using the Social Security system as an example. Comparing a privatized alternative with the current system via simulation, we document that choice in both equity allocation and equity composition lead to increased income inequality and risk of shortfalls relative to currently promised benefits. While private accounts disproportionately increase shortfall risk for low-income workers, allowing choice increases risk for all workers (even with high return outcomes). Our results suggest that restricted choice should be a central component of private-account-based systems.
Number of Pages in PDF File: 43
Keywords: Social Security, Private Retirement Accounts, Behavioral Finance
JEL Classification: H55, J25working papers series
Date posted: October 1, 2012 ; Last revised: May 7, 2013
© 2013 Social Science Electronic Publishing, Inc. All Rights Reserved.
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