Understanding Individual Account Guarantees

36 Pages Posted: 14 Sep 2002 Last revised: 29 Oct 2010

See all articles by Marie-Eve Lachance

Marie-Eve Lachance

affiliation not provided to SSRN

Olivia S. Mitchell

University of Pennsylvania - The Wharton School; National Bureau of Economic Research (NBER)

Multiple version iconThere are 2 versions of this paper

Date Written: September 2002

Abstract

Demographic aging renders workers vulnerable to the inherent uncertainty of unfunded social security systems. This realization has set off a global wave of social security reforms, and numerous countries have now set up Individual Accounts (IA) plans in response. Strengths of IAs are that participants gain ownership in their accounts, and they also may diversify their pension investments; additionally, they produce a capitalized, funded system that enhances old-age economic security. While IAs reduce the risk participants face due to unfunded social security systems, participants holding capital market investments in IAs are exposed to fluctuations in the value of their pension assets. Concern over market volatility has prompted some to emphasize the need for guarantees' of pension accumulations. This paper offers a way to think about guarantees in the context of a social security reform that includes Individual Accounts. When a pension guarantee has economic value to participants, it will have economic costs. We illustrate how these costs can be important and vary significantly with time horizon, investment mix, and guarantee design. Our findings indicate that plan designers and budget analysts would do well to recognize such costs and identify how they can be financed.

Suggested Citation

Lachance, Marie-Eve and Mitchell, Olivia S., Understanding Individual Account Guarantees (September 2002). NBER Working Paper No. w9195. Available at SSRN: https://ssrn.com/abstract=330334

Marie-Eve Lachance

affiliation not provided to SSRN

Olivia S. Mitchell (Contact Author)

University of Pennsylvania - The Wharton School ( email )

Philadelphia, PA 19104-6365
United States

National Bureau of Economic Research (NBER)

1050 Massachusetts Avenue
Cambridge, MA 02138
United States

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