Reducing the Risk of Investment-Based Social Security Reform

Topics:
Insurance,
Investment and Capital Markets
Tags:
Finance,
Social Security,
Risk,
Return,
Operational Accounting,
National Bureau Of Economic Research,
Management,
Investment,
Government,
Strategy
Source:
National Bureau of Economic Research

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Overview: This paper describes the risks implied by a mixed system of Social Security pension benefits with different combinations of pay-as-you-go taxes and personal retirement account (PRA) saving. The analysis shows how these risks can be reduced by using alternative private market guarantee strategies. The first such strategy uses a blend of equities and TIPS to guarantee at least a positive real rate or return on each year's PRA saving. The second is an explicit zero-cost collar that guarantees an annual rate of return by giving up all returns above a certain level. An alternative strategy provides a combined guarantee on the return during both the accumulation and the annuity phase.

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Format: PDF | Size: 219KB | Date: Jan 2005 | Pages: 30

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