The Role of Earnings and Financial Risk in Distributional Analyses of Social Security Reform Measures

Abstract

The Social Security Trustees project that the Social Security program faces long-term financing difficulties. Several proposals offered to shore-up the finances of the Social Security program would create individual retirement accounts funded with part of the payroll tax. The authors of many of these proposals claim that future beneficiaries will be better-off under their new system than under the current system. This study examines the consequences of differing earnings patterns and year-to-year differences in asset returns have for Social Security retired worker benefits in three Social Security reform proposals. Incorporating both actual earnings histories and variation in asset returns shows that none of the three individual account plans can always deliver benefits that are higher than payable current law benefits.

Keywords: Social Security, retirement, Social Security reform, retirement income

JEL Classification: J3