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Social Security Personal-Account Participation with Government Matching

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by Gary V. Engelhardt and Anil Kumar September 2004

WP#2004-22  

Abstract 

This paper examines the potential impact of government matching contributions on personal-account participation in the President's Commission on Strengthening Social Security's Model 3 for Social Security reform. Given the government's choice of four plan-design parameters, the magnitude of the match is determined solely by the differential return personal-account assets receive above the notional return, referred to as the "personal-account premium," akin to the equity premium. The impact of matching on personal-account participation is simulated for older workers (ages 40 to 65) in the first wave of the Health and Retirement Study (HRS) using empirical estimates from a structural model of the impact of employer matching on participation in corporate 401(k) plans. For a personal-account premium of five percentage points, which implies a match rate of 12.5 percent for middle- to lower-income workers, the simulations imply that 53 percent of older workers would participate in voluntary personal accounts. The response of participation to matching is very inelastic; it is very unlikely that participation by older workers would achieve the mid-range assumption by the Commission of 67 percent. There is substantial heterogeneity in participation across subsets of older workers: participation would be the lowest for low-educated, minority, and unmarried older workers.

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Gary V. Engelhardt is an associate professor of economics at Syracuse University and a senior research associate at Syracuse’s Center for Policy Research. Anil Kumar is an economist in the Research Department at the Federal Reserve Bank of Dallas. All research with the restricted-access data from the Health and Retirement Study was performed under agreement in the Center for Policy Research at Syracuse University. The research reported herein was supported (in part) by the Center for Retirement Research at Boston College pursuant to a grant from the U.S. Social Security Administration. The opinions and conclusions are solely those of the authors and should not be construed as representing the opinions or policy of the Social Security Administration or any agency of the Federal Government, Federal Reserve, Syracuse University or the Center for Retirement Research at Boston College.