Simulating the Distributional Consequences of Personal Accounts: Sensitivity to Annuitization Option

Abstract

Recent Social Security reform efforts focus predominantly on the establishment of personal retirement accounts either to supplement or partially replace the current Social Security program. An important issue related to these personal accounts is whether they will redistribute income and how any redistribution compares to that under the current Social Security system. The answer depends in part on how personal accounts are disbursed upon retirement. In particular, it depends on how mandatory annuitization would impact different groups, especially those with shorter life spans, and whether certain annuity features would offset the drawbacks associated with forcing even those with short life expectancies to annuitize. This paper presents a first step toward answering these questions. It first compares the distributional impacts of personal accounts to the current system. It then examines how different strategies for annuitizing personal account balances might change these distributional impacts. Of particular interest is whether certain annuity features can benefit workers with shorter life spans.