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Reform Model Two of the President’s Commission to Strengthen Social Security: Distributional Outcome

August 1, 2004
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Working Paper by Melissa M. Favreault, Joshua H. Goldwyn, Karen E. Smith, Lawrence H. Thompson, Cori E. Uccello, and Sheila R. Zedlewski

Abstract

This project uses dynamic microanalytic simulation techniques to explore the distributional consequences of Plan 2 of the President’s Commission to Strengthen Social Security. This plan includes a voluntary personal account that would be “carved out” of currently-scheduled benefit contributions, a new minimum benefit, and an increase in widow(er)s benefits. It also shifts the current wage-indexed initial benefit formula to a price-indexed formula to address most of the current system’s long-term solvency problem. The analysis begins by adopting the assumptions of the Office of the Chief Actuary (OCACT) regarding portfolio allocation, rates of return, administrative costs, and mandatory annuitization of personal account balances to develop a baseline of Model 2. We compare the distributional results with current-law promised benefits and a current-law scenario adjusted to match the revenues we estimate are required to fund the OCACT baseline in 2050 exclusive of the private account provisions. Subsequently, we test the sensitivity of our baseline estimates to different assumptions about participation in personal accounts, investment patterns, administrative costs, variation in market returns across the life cycle, and rates of return on investments. To simulate likely participation patterns in voluntary private accounts and participants’ portfolio allocation choices, we estimate models using recent data from the Survey of Consumer Finances. The results from our core and sensitivity analyses bracket the likely outcomes of the reform plan and demonstrate how this type of reform might affect subgroups of the future elderly population.

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Author(s)
Headshot of Melissa M. Favreault
Melissa M. Favreault
Headshot of Joshua H. Goldwyn
Joshua H. Goldwyn
Headshot of Karen E. Smith
Karen E. Smith
Headshot of Lawrence H. Thompson
Lawrence H. Thompson
Headshot of Cori E. Uccello
Cori E. Uccello
Headshot of Sheila R. Zedlewski
Sheila R. Zedlewski
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Executive Summary
Citation

Favreault, , Joshua H. Goldwyn, Karen E. Smith, Lawrence H. Thompson, Cori E. Uccello, and Sheila R. Zedlewski. 2004. "Reform Model Two of the President's Commission to Strengthen Social Security: Distributional Outcome" Working Paper 2004-19. Chestnut Hill, MA: Center for Retirement Research at Boston College.

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Topics
Social Security
Publication Type
Working Paper
Publication Number
WP#2004-19
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