Social Security: Issues of Privatization

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E M P L O Y E E   B E N E F I T S ,   C O M P E N S A T I O N
                  A N D   P E N S I O N   L A W
                   Vol. 2, No. 9: May 10, 2000
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Publisher:     Legal Scholarship Network
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Editor:        PAMELA J. PERUN
               Urban Institute
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                      Topic of This Issue:
            Social Security: Issues of Privatization
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T A B L E of C O N T E N T S
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NEW and FORTHCOMING ARTICLES

"Administering Individual Accounts in Social Security: The Role
of Values and Objectives in Sharing Options"
      The Retirement Project
     LAWRENCE H. THOMPSON
        Urban Institute
        Executive Office Research

"Evaluating the Archer-Shaw Social Security Proposal"
      EBRI Notes, Vol. 21, No. 6, June 2000
     CRAIG COPELAND
        Employee Benefit Research Institute (EBRI)

WORKING PAPERS

"Privatizing Public Pension Systems: Lessons for the United
States from Latin America"
     JOHN B. WILLIAMSON
        Boston College
        Department of Sociology

"Social Security Privatization: Lessons from the United Kingdom"
     JOHN B. WILLIAMSON
        Boston College
        Department of Sociology

"The Effects of Social Security Reform on Saving, Investment, and
the Level and Distribution of Worker Well-Being"
     GARY BURTLESS
        Brookings Institution
     BARRY BOSWORTH
        Brookings Institution

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N E W and F O R T H C O M I N G Articles
_________________________________________________________________

"Administering Individual Accounts in Social Security: The Role
of Values and Objectives in Sharing Options"
The Retirement Project

      BY: LAWRENCE H. THOMPSON
              Urban Institute
              Executive Office Research

Contact: LAWRENCE H. THOMPSON
   Email: Mailto:LThompso@ui.urban.org
Postal: Urban Institute
           Executive Office Research
           2100 M Street, NW
           Washington, DC 20037
   Phone: 202-261-5526
     Fax: 202-728-0232

ABSTRACT:
This paper seeks to clarify the current debate surrounding
individual accounts by exploring systematically the variety of
structural and administrative arrangements that either have been
proposed for individual account systems in this country or have
been adopted in other parts of the world. Plans from Chile,
Latin America, Australia, the United Kingdom, Sweden and the
United States are examined, including the Roth, personal
security accounts, Ball, Porter, Moynihan and Feldstein/Samwick
proposals. The paper focuses on two aspects of arrangements: (1)
the mechanisms employed under each plan to move the money from
contributors to pension fund managers and back to retirees and
(2) the variations among the plans in the financial management
choices available to workers. The purpose is to analyze the
logic underlying different structural arrangements, and to help
quantify the linkage between structure and outcomes. In
particular, available information can help to illustrate some of
the potential relationships between the structure of an
individual account plan, gross investment returns,
administrative costs, and net returns. The goals of individual
accounts systems include an improved overall economy, higher
rates of return on Social Security contributions, greater
individual choice and responsibility, and reduced government
liabilities. No single plan is likely to be the best one to
achieve all of these goals. Constructing an individual account
plan requires making choices in which one objective must be
sacrificed in order to pursue another. The administrative costs
associated with the plans implemented in Latin America and the
United Kingdom have caused some analysts to look for alternative
structures that promise lower costs and (potentially) higher net
returns to workers. The alternatives tend to suffer from one or
more drawbacks of their own, however. Employers may have to
shoulder a higher burden, worker choice may be constrained, or
the government may have to be relied upon to play a major role
in collecting contributions, maintaining account information, or
even managing the accumulating funds. The trade-off between
worker choice and administrative costs is also present in the
design of withdrawal options, where choice is likely to increase
costs as a result of both adverse selection and the marketing
and promotional costs of private insurers. A further issue that
divides plans concerns the treatment of gender differences in
life expectancy under the different payment options. Before
Americans can consider proposals for individual accounts they
must first develop more of a consensus about the relative
importance of the objectives being pursued and the social values
being understood.

Keywords: individual account, Social Security, pension, worker
choice, government, arrangement

JEL Classification: H55, J26, J33, J38, P50
______________________________

"Evaluating the Archer-Shaw Social Security Proposal"
EBRI Notes, Vol. 21, No. 6, June 2000

BY: CRAIG COPELAND
Employee Benefit Research Institute (EBRI)

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=265229

Contact: CRAIG COPELAND
   Email: Mailto:copeland@ebri.org
Postal: Employee Benefit Research Institute (EBRI)
           Suite 600
           2121 K Street, NW
           Washington, DC 20037-1896 USA
   Phone: 202-775-6356
     Fax: 202-775-6312

Paper Requests:
Contact Alicia Willis at Mailto:willis@ebri.org, or 2121 K St.,
NW, Suite 600, Washington, DC 20037-1896. Phone:(202)775-9132,
Fax:(202)775-6312. Full-Text downloads are available from SSRN
Online for $7.50.

ABSTRACT:
Social Security emerged as one of the biggest policy differences
between the Democratic and Republican nominees for president in
2000 - although both candidates outlined only general ideas on
Social Security reform and did not advance any specific
proposals. Al Gore's position was that the normal retirement age
should not be raised, and the present system should be
preserved. In contrast, George W. Bush voiced support for the
establishment of individual accounts, using a portion of the
existing payroll taxes to fund these accounts (the so-called
"carve-out" approach), and said he will use "political capital"
to achieve this reform. This Notes article examines the
Archer-Shaw 1999 proposal using the EBRI-SSASIM2 Policy
Simulation Model.

Keywords: Social Security financing, Social Security modeling,
Social Security reform

The PDF for the above title, published in the June 2000 issue
of EBRI Notes, also contains the fulltext of another June 2000
EBRI Notes article abstracted on SSRN: "Value of Benefits
Constant in a Changing Job Environment: The 1999
WorldatWork/EBRI Value of Benefits Survey."

JEL Classification: H55
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W O R K I N G P A P E R Abstracts
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"Privatizing Public Pension Systems: Lessons for the United
States from Latin America"

      BY: JOHN B. WILLIAMSON
              Boston College
              Department of Sociology

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=252053

Paper ID: Ctr for Retirement Research Working Paper No. 1999-03
Date: November 2000

Contact: JOHN B. WILLIAMSON
   Email: Mailto:JBW@bc.edu
Postal: Boston College
           Department of Sociology
           McGuinn Hall 424
           140 Commonwealth Avenue
           Chestnut Hill, MA 02467 USA
   Phone: 617-552-8530
     Fax: 617-552-4283

Paper Requests:
Contact Andy Eschtruth, Assoc. Dir. External Relations, Center
for Retirement Research, Boston College, Fulton Hall 550,
Chestnut Hill, MA 02467-3808. Phone: (617)552-1729. Fax:
(617)552-1750. Mailto:eschtrut@bc.edu

ABSTRACT:
The primary goal of this study is to cast light on what might
happen were the United States to partially privatize its Social
Security system. The analysis draws on evidence from four Latin
American countries that have privatized their public pension
schemes (Chile, Mexico, Bolivia, and El Salvador) and four that
have partially privatized (Argentina, Uruguay, Colombia, and
Peru). In Latin America privatization tends to have positive
economic effects. It contributes to the development of financial
institutions and to an increase in investment capital. There is
less consensus, but at least some evidence suggesting that it
may increase the national savings rate and economic growth.
However, privatization also leads to higher administrative costs
as well as an increase in both income and gender inequality. In
addition, there is a risk that many low-wage workers and
particularly women will end up worse off with defined
contribution than with defined benefit schemes.

Keywords: Social Security, Pensions

JEL Classification: D31, E20
______________________________

"Social Security Privatization: Lessons from the United Kingdom"

      BY: JOHN B. WILLIAMSON
              Boston College
              Department of Sociology

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=251705

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           papers/wp_2000-10.pdf
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           downloaded from the SSRN Electronic Paper Collection
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           them into your browser eliminating all spaces.

Paper ID: BC Center for Retirement Research WP No. 2000-10
Date: November 2000

ABSTRACT:
This study draws lessons for the debate about the proposed
partial privatization of Social Security in the United States
based on evidence from the United Kingdom. The British case
suggests that privatization may lead to a reduction in the
pension burden on the national budget if combined with
substantial cuts in benefits. Such reforms may have positive
effects on the economy, but any such benefits would come at the
cost of increased inequality and lower pension benefits for many
low-wage workers, particularly women. Because Social Security is
a path dependent process, policy history differences make it
less likely that Americans will easily accept the level of
privatization found in Britain.

Keywords: Privatization, reforms, Social Security, United
Kingdom

JEL Classification: H55, J32
______________________________

"The Effects of Social Security Reform on Saving, Investment, and
the Level and Distribution of Worker Well-Being"

      BY: GARY BURTLESS
              Brookings Institution
           BARRY BOSWORTH
              Brookings Institution

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=252050

Paper ID: Working Paper No. 2000-02
Date: January 2000

Contact: GARY BURTLESS
   Email: Mailto:crr@bc.edu
Postal: Brookings Institution
           Center for Law, Economics and Politics
           1775 Massachusetts Ave. NW
           Washington, DC 20036-2188 USA
   Phone: 202-797-6130
     Fax: 202-797-6181
Co-Auth: BARRY BOSWORTH
   Email: Mailto:bbosworth@brook.edu
Postal: Brookings Institution
           Center for Law, Economics and Politics
           1775 Massachusetts Ave. NW
           Washington, DC 20036-2188 USA

ABSTRACT:
All observers agree that Social Security reform is needed
restore the program's solvency. This paper examines the impact
of alternative reforms on Social Security finances, on the wider
U.S. economy, and on workers who contribute to and receive
benefits from the program. In one reform we consider, Social
Security benefits are eventually reduced about one-third so that
benefits can be financed with the present 12.4 percent payroll
tax rate. Workers are required to contribute an additional 2
percent of their wages to a new defined-contribution pension. We
embed Social Security's finances in a neoclassical growth model
and show how additions to Social Security and
defined-contribution pension reserves, if they are saved, can
increase the future growth of productivity and wages and reduce
the rate of return on capital. These economy-wide impacts in
turn affect the lifetime wages and pensions of workers born in
successive generations. They have differing effects on workers
depending on workers' relative earnings and the trend in their
earnings over their careers. Our model includes a
microsimulation component to measure these effects on individual
workers.

Our findings suggest that scaling back traditional Social
Security and replacing part or all of it with
defined-contribution pensions can potentially increase national
saving over a very lengthy horizon, thus lifting the domestic
capital stock and wages. The potential benefits are larger for
high-wage workers than for average- and low-wage workers.
Because of the potential impact of this reform on the U.S.
capital-labor ratio, real capital returns might be adversely
affected by this reform, reducing the rate of return workers
will obtain in their defined-contribution pension accounts. Our
results also imply that generations which will retire before
about 2035 would enjoy higher lifetime pensions and net incomes
under a policy that maintains Social Security benefits with tax
hikes. That is, generations that will retire over the next 30 or
40 years would be better off under a policy that preserves
Social Security through tax hikes than under a policy that
scales back benefits and partially replaces them with benefits
from a new defined-contribution system.