Made Poorer by Choice: Worker Outcomes in Social Security v. Private Retirement Accounts
Posted: 11 May 2013
Date Written: 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.
Keywords: Social Security, private retirement accounts, behavioral finance
JEL Classification: D14, G11, H55
Suggested Citation: Suggested Citation