Implications of Social Security Reform on Interest Rates: Theory and Evidence

This article investigates the potential effect that Social Security reform may have on bond and equity returns. We specifically focus on the effect of proposals to shift a portion of the investment of the U.S. Social Security Trust Fund to the equities market. Models are developed to demonstrate the relationship between returns and both the relative size of the Social Security Trust Fund and the portfolio allocation of the Trust Fund. Using these two models, we then show that interest rates will increase from either a decrease in the size of the Social Security Trust Fund or a shifting in the investment mix from bonds to equities. We derive an adjustment factor that relates the magnitude of change in interest rates from either source and use this adjustment factor in conjunction with estimates of the relationship between government debt and interest rates to forecast the potential effect on interest rates from shifting part of the Trust Fund to the equity market. The estimates herein suggest that investing some of the Social Security funds in equities is not a painless cure‐all for the Social Security system and may even have some adverse effects in terms of income transfers from American taxpayers to foreign bondholders.     

Social Security reform: the effect of investing in equities

Several proposals have been developed to reform the Social Security System to ensure that it is fully funded. The investment of a portion of Social Security funds in equities has often been proposed as a means to avoid increasing payroll taxes. This paper develops a general equilibrium model to demonstrate that investing Social Security funds in equities will decrease the return on equities and increase interest rates on bonds, which also leads to an increase in general income taxes. Thus, investing Social Security funds in equities simply shifts a potential increase in payroll taxes to an increase in income taxes.     

社会保障基金投资浅析——论政府的主导作用及地位

政府是社会保障制度的责任主体，在社会保障基金投资中也具有主导地位。本文首先从政府的角度分析社会保障基金投资的必要性，从而引出政府在社会保障基金投资中如何发挥作用。社会保障基金投资本质是为了实现保值增值，但形式上也成为了政府宏观调控的重要工具，同时实现了经济、社会双重效用。     

Alternative Methods for Projecting Equity Returns: Implications for Evaluating Social Security Reform Proposals

The effect upon future Social Security benefits resulting from the introduction of individual accounts depends on both the potential risks and returns of private equities, yet the historical evidence about the determinants of stock market risks and returns is mixed. In particular, correlations between equity returns and market fundamentals (such as the dividend–price ratio) are weak at annual frequencies, which has led some to conclude that a random returns (fixed mean and variance) model is the preferred specification for simulating the future path of equity returns. Although choosing between the random returns model and models based on market fundamentals does equally well for explaining variation of equity returns in the short run, the distinction is important when projecting equity returns over longer periods, as shown here in the context of a Monte Carlo simulation of Social Security reform. If equity returns are even weakly correlated with market fundamentals then (1) the expected future average return may be a function of the starting values for market fundamentals, and (2) the overall range of cumulative outcomes is narrower than the random returns model suggests.     

Critical commentary: Government accounting and the politics of fear. A NOTE ON FEDERAL GOVERNMENT ACCOUNTING AND THE POLITICS OF FEAR

This paper describes the misleading information regarding Social Security and Medicare that is conveyed by political activists to the general public and promoted in the financial community. One way to limit these misleading efforts is to arm the public with some basic knowledge of governmental fund accounting; accountants should also promote improved reporting by the federal government.     

401(k) Investment Decisions and Social Security Reform

Abstract

This paper uses the 1995 Survey of Consumer Finances to show that 401(k) participants with an underlying defined benefit plan are more likely to invest in equities than are participants whose 401(k) is their primary plan. This suggests that workers with a guaranteed source of retirement income are more likely to invest their other retirement assets more aggressively. Removing this guarantee might result in more conservative investment. Therefore, using current 401(k) asset allocation behavior to project income under a Social Security individual account system with reduced guaranteed benefits could overstate returns to these accounts, thus overstating their attractiveness relative to the current system.     

Mitigating America's demographic dilemma by pre-funding social security

Financing Social Security benefits at current levels implies significant increases in payroll taxes within the next 20 years under current US demographic developments. Using a general-equilibrium overlapping-generations model with realistic patterns of fertility and lifespan extension, this study shows that future generations would be harmed during the demographic transition due to rising payroll taxes, which crowd out savings and slow real wage growth below the rate of technological progress. A faster rate of technological progress would mitigate only some of the payroll tax increase and its economic consequences but could not overcome them. Addressing the financing problem by reducing Social Security benefits as needed or by raising the eligibility age for benefits imposes major welfare losses on current or near term retirees. By contrast, a pre-funding of Social Security financed with consumption taxes more evenly spreads the welfare losses across generations, and it helps future generations, especially the poor, by stimulating capital formation.     

Social Security investment accounts: lessons from participant-directed 401(k) data

Newly available 401(k) participant investment data may have implications for individual Social Security account (IA) proposals. We found that women with wages between $25,000 and $50,000 have a significantly greater probability of investing a small percentage of their 401(k) in equities than their male counterparts, but those with salaries over $75,000 have a smaller probability. Hence, women’s less aggressive investment behavior may be primarily due to younger cohorts and may not apply above a threshold wage. However, overall, 28.4% of men and 33.8% of women are conservative investors, suggesting the possible risk low IA accumulations under some proposals.     

POTENTIAL CONSEQUENCES FOR EMPLOYERS OF SOCIAL SECURITY "PRIVATIZATION:" POLICY RESEARCH IMPLICATIONS

Abstract: While traditional fixes to restore Social Security to actuarial balance have known consequences for employers, opinion polls show strong public support for nontraditional approaches, e.g., the stock market investment of Social Security funds (privatization). The authors examine some of the complex assumptions which have been raised as the basis for determining if privitization would benefit employers and discuss the lack of research available to support or dispute the validity of some of these assumptions.     

“Unfunded liabilities” and uncertain fiscal financing

A rational expectations framework is developed to study the consequences of alternative means to resolve the “unfunded liabilities” problem—unsustainable exponential growth in federal Social Security, Medicare, and Medicaid spending with no plan to finance it. Resolution requires specifying a probability distribution for how and when monetary and fiscal policies will change as the economy evolves through the 21st century. Beliefs based on that distribution determine the existence of and the nature of equilibrium. We consider policies that in expectation combine reaching a fiscal limit, some distorting taxation, modest inflation, and some reneging on the government's promised transfers. In the equilibrium, inflation-targeting monetary policy cannot successfully anchor expected inflation. Expectational effects are always present, but need not have a large impacts on inflation and interest rates in the short and medium runs.     

Strategic asset allocation for individual investors: the impact of the present value of Social Security benefits

This paper demonstrates the dramatic effect of Social Security wealth on individuals’ asset allocation. We first discuss why Social Security wealth should be included in portfolio asset-mix decisions. We then draw parallels between Social Security benefits and inflation-indexed treasury bonds to help quantify the present value of Social Security benefits. Finally, we show the portfolio impact of including Social Security wealth under several asset-mix decision rules. Excluding Social Security wealth from the asset mix decision results in suboptimal portfolios. Including Social Security wealth provides an incentive for including more stock in the asset mix.     

The Public Pension Reform Debate in the United States and International Experience

This article describes the recent debate on Social Security in the United States. To provide some perspectives on the U.S. system, comparisons with public pension systems in other countries are made throughout the article. The article is organized as follows. The first section discusses financing problems in the U.S. Social Security system. Following this, the U.S. Social Security system is described. Options for fixing public pension systems are discussed next. The topic of individual accounts appears in its own section.     

Social Security

Abstract

The U.S. Social Security program (Old-Age, Survivors, and Disability Insurance) was enacted in 1935, long after many European nations had instituted similar ones. The driving force for such action was the Great Depression of the early 1930s, which had pushed many persons into poverty. The program was not intended to solve the immediate problem (which instead was handled by federal funding of state public assistance plans), but rather as an initial step of preventive action for the long run.

The current financial status of the Social Security program is excellent over the short range, but very likely a significant, although not overwhelming, problem is present as to the long range. Various proposals to remedy the situation are examined, some merely maintaining the existing character of the program but reducing benefit costs and/or increasing its income, and others reducing its scope by partially or wholly privatizing it.     

Junior must pay: pricing the implicit put in privatizing Social Security

Summary. Proposals that a portion of the Social Security Trust Fund assets be invested in equities entail the possibility that a severe decline in equity prices will render the Funds assets insufficient to provide the currently mandated level of benefits. In this event, existing taxpayers may be compelled to act as insurers of last resort. The cost to taxpayers of such an implicit commitment equals the value of a put option with payoff equal to the benefits shortfall. We calibrate an OLG model that generates realistic equity premia and value the put. With 20 percent of the Funds assets invested in equities, the highest level currently under serious discussion, we value a put that guarantees the currently mandated level of benefits at one percent of GDP, or a temporary increase in Social Security taxation of, at most, 20 percent. We value a put that guarantees 90 percent of benefits at .03 percent of GDP. In contrast to the earlier literature, our results account for the significant changes in the distribution of security returns resulting from Trust Fund purchases.We thank Henning Bohn for his insightful comments. We also thank Kenneth Arrow, Jean Boivin, John Campbell, Kenn Judd, Narayana Kocherlakota, Mordecai Kurz, Rick Mishkin, Nobu Kiyotaki, Ed Prescott, Steve Ross, Andrei Shleifer, Kent Smetters, Luis Viceira, David Webb, Steve Zeldes and the seminar participants at Columbia, Harvard, LSE, Minnesota, MIT, NYU, Oslo, Stanford, Stockholm School of Economics, UCLA, USC, Wharton, Wisconsin and Yale for helpful discussions.     

社会保障绩效评估指标体系思考

本文主要研究了社会管理创新中的关于社会保障方面的绩效评估体系.本文认为,社会管理的主体应该包括政府和其他社会主体,如社会组织、私人和企业等,因而在绩效评估方面,不仅要对政府在社会保障方面的绩效进行评估,也应该对社会主体在社会保障方面的行为进行评估,建立起客观的和主观的绩效评估指标体系.     

新旧制度并行下农村社会养老制度发展摭探

农村社会养老保险是农村社会保障制度的核心内容,建立和完善农村社会养老保险制度是建设社会主义新农村的和谐社会的必然要求。我国农村目前已经步入老龄化社会,养老的危机对政府、社会的养老责任形成挑战,单纯依靠传统的家庭养老模式和旧的养老制度模式已经不能满足现实中养老压力的需求。在此条件下,对新型农村社会养老模式进行深入的分析并探讨制度运行中政府的作用有着深远的理论意义和现实意义。     

Out-of-Pocket Health Expenditures: A Suggested Role for Social Security

We present economic data to demonstrate that the (random) out-of-pocket health-related expenses of seniors who face medical problems are significant and increasing over time. This remains the case even when we take into account the availability of supplemental health insurance. We propose to apply a modest part of Social Security benefits, without increasing the total expenses of this system, to provide mandatory supplemental health insurance for all recipients. Using a theoretical framework we demonstrate that introducing such additional role for Social Security makes individuals (ex ante) better off and hence results in a Pareto dominating new regime for Social Security.     

Optimal social security claiming behavior under lump sum incentives: Theory and evidence

Many Americans claim Social Security benefits early, though this leaves them with lower monthly payments throughout retirement. We build a lifecycle model that closely tracks claiming patterns under current rules, and we use it to predict claiming delays if, by delaying benefits, people were to receive a lump sum instead of an annuity. We predict that current early claimers would defer claiming by a year given actuarially fair lump sums, and the predictions conform with respondents' answers to a strategic survey about the lump sum. In other words, such a reform could provide an avenue for encouraging delayed retirement without benefit cuts or tax increases. Moreover, many people would still defer claiming even for smaller lump sums.     

The retirement wealth of the baby boom generation

The paper compares the well-being of the baby boom generation (ages 40-55) in 2001 with the same age group in 1983. I find little evidence that their relative position deteriorated over the period. By some indicators, this generation has seen an improvement. In terms of income, the 40-55 age group was at about the same relative position in 2001 as in 1983. In terms of conventional wealth, there was some slippage over the period. In terms of mean augmented wealth (net worth plus pension and Social Security wealth), their relative position improved somewhat but in terms of median augmented wealth there was again some slippage.     

The impact of the Social Security Fund on auditor litigation risk

In this study, we examine the effect of the Social Security Fund on auditor litigation risk. Using audit fees as a proxy for auditor perceptions of litigation risk, we find that the Social Security Fund significantly reduces auditor litigation risk. Furthermore, we show that the Social Security Fund influences auditor litigation risk through reducing both the audit risk and the business risk of public companies. In addition, the impact of the Social Security Fund for reducing auditor litigation risk is more obvious in the group of firms with low levels of internal governance, which indicates that the Social Security Fund plays an important governance role as a high-quality institutional investor. In summary, we verify that the Social Security Fund, when acting as an institutional investor, plays an important role in corporate governance, and that it helps to reduce auditor litigation risk. Our results provide empirical support for expanding the governance role of the Social Security Fund as an institutional investor in China’s A-share market.