Leverage, Linkage, and Leakage: Problems with the Private Pension System and How They Should Inform the Social Security Reform Debate
53 Pages Posted: 4 Sep 2001
The problems of the private sector retirement system should be considered in the debate over whether to introduce individual investment accounts into social security. The paper considers three problems of the private pension system, leverage, linkage, and leakage. By leverage the paper refers to the common understanding that the tax treatment of private pension plans is intended to leverage the qualified-plan tax benefits for business owners and managers through regulation into benefits for lower and moderate income workers. By linkage, the paper refers to the idea that it is desirable for participant benefit expectations to be linked to the actual benefits that they will receive. By leverage, the paper refers to the idea that retirement plan assets should be reserved for retirement income. The paper suggests that these ideas are imperfectly realized in the private pension system. The paper also suggests that social security has provided a balance to the private pension system, since its benefits are weighted to the low and moderate income worker, its benefits are more or less certain, and are strongly committed to retirement purposes. A private account system would likely result in the social security system replicating the weaknesses of the private pension system rather than providing a counter to them. The paper also explores how private accounts might be structured to mitigate but not eliminate some of the problems that a private account system would introduce into social security.
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