Tuesday, April 18, 2006

Is Social Security Income Risky?

In ec 10 this spring, Marty Feldstein talked about proposals to incorporate personal accounts into Social Security. Critics of such proposals say they put too much risk onto retirees.

A new paper by John Shoven and Sita Slavov, however, points out that our current Social Security system is far from risk-free:

Pay-as-you-go Social Security is typically characterized as a universal defined benefit pension program. Implicit in this characterization is a sense that the participant’s investment in future benefits is somehow guaranteed, or safe from risk. This study develops the concept of “political risk” as the possibility that some future legislature will be forced to change the tax and benefit provisions of pay-as-you-go social security programs, when there are changes in the demographic and macroeconomic variables that support it. Thus there is a “political risk” to participants that might be compared to the “market risk” in a personal accounts retirement scheme....The debate over personal accounts, therefore, is not one of “safe” versus “risky” benefits, but one of portfolio choice.
I emphasized a similar theme in an article in the New Republic last year.