Partial Privatization of Social Security and Private Pensions

Abstract:     
Policymakers and analysts have widely debated many aspects of the various reform proposals but have paid relatively little attention to how Social Security reform would affect employer-sponsored pensions. Yet, Social Security does not provide retirement income in a vacuum. Rather, our national retirement income system is often referred to as a three-legged stool with Social Security representing one of the legs and employer-sponsored pension plans and individual savings representing the other two legs. Because changes in one leg of the stool, Social Security, are likely to have a direct impact on the other two legs of the stool, Social Security reform must be not be considered in isolation but must be viewed in light of its effect on employer-sponsored pensions and individual savings. Accordingly, this Article analyzes how one of the most popular reform proposals, partial privatization, would likely affect private pensions.

The Article begins by examining how partial privatization would likely affect the integration rules and integrated plans because the tax integration rules are the one area of retirement law that expressly coordinates private pensions and Social Security. Integration, however, is not the only way in which private pensions are linked to Social Security. Because Social Security has a central role in providing retirement income, almost all pension plans are implicitly linked to Social Security, insofar as their design takes into account the provisions of and benefits provided by Social Security. Thus, this Article then considers how partial privatization would likely interact with the other links between private pensions and Social Security. Specifically, it considers how partial privatization would likely affect (1) employees' demand for defined benefit plans, (2) employees' willingness to contribute to employer-sponsored defined contribution plans, (3) employees' investment behavior with respect to the assets in their employer-sponsored plans, and (4) investment returns available to employer-sponsored plans.

Working Paper Series