Social Insecurity? Personal Accounts and the Stock Market Collapse

American Enterprise Institute for Public Retirement Policy Research No. 1

9 Pages Posted: 8 Dec 2008

Date Written: November 21, 2008

Abstract

The recent financial crisis and ensuing stock market gyrations have drawn renewed attention to Social Security reform, in particular proposals to establish personal retirement accounts that invest in stocks and bonds. As Barack Obama asked a campaign audience, "Imagine if you had some of your Social Security money in the stock market right now. How would you be feeling about the prospects for your retirement?" But despite the recent market downturn, individuals investing four percentage points of the 12.4 percent payroll tax in a personal account holding a "life-cycle" portfolio and retiring today would have increased their total Social Security benefits by more than 15 percent. Moreover, a simulation of ninety-five cohorts of individuals retiring from 1915 through 2008 found that all of them would have increased their total Social Security benefits by holding personal accounts. These results are not intended to understate the risks of equity investment, but rather put them in perspective. Some analysis has overstated the importance of returns over a short period of time relative to those over the full course of a working lifetime by looking at declines in stock returns over only the last year. While individuals retiring today may have ended with a lower account balance than they expected, they would nevertheless have significantly increased their total retirement benefits by virtue of choosing to participate in a personal retirement account.

Keywords: Social Security, private accounts, Lifetime portfolio selection, portfolio choice, pensions, old age insurance, social insurance, stock market, returns, historical simulation, life cycle portfolio

JEL Classification: H55

Suggested Citation

Biggs, Andrew G., Social Insecurity? Personal Accounts and the Stock Market Collapse (November 21, 2008). American Enterprise Institute for Public Retirement Policy Research No. 1. Available at SSRN: https://ssrn.com/abstract=1313168 or http://dx.doi.org/10.2139/ssrn.1313168

Andrew G. Biggs (Contact Author)

American Enterprise Institute ( email )

1150 17th Street N.W.
Washington, DC 20036
United States
202-862-5841 (Phone)

HOME PAGE: http://www.aei.org

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