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The Effect of Pay-When-Needed Benefit Guarantees on the Impact of Social Security Privatization

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  • Political Science

Abstract

The Effect of Pay-When-Needed Benefit Guarantees on the Impact of Social Security Privatization This PDF is a selection from an out-of-print volume from the National Bureau of Economic Research Volume Title: Risk Aspects of Investment-Based Social Security Reform Volume Author/Editor: John Y. Campbell and Martin Feldstein, editors Volume Publisher: University of Chicago Press Volume ISBN: 0-226-09255-0 Volume URL: http://www.nber.org/books/camp01-1 Publication Date: January 2001 Chapter Title: The Effect of Pay-When-Needed Benefit Guarantees on the Impact of Social Security Privatization Chapter Author: Kent Smetters Chapter URL: http://www.nber.org/chapters/c10592 Chapter pages in book: (p. 91 - 112) �3 The Effect of Pay-When-Needed Benefit Guarantees on the Impact of Social Security Privatization Kent Smetters 3.1 Introduction Many plans to privatize the mostly unfunded U.S. social security defined-benefit program implicitly contain unfunded obligations of their own in the form of benefit guarantees. One example is the promise that the assets in the new private accounts will produce an annuitized retire- ment benefit at least equal to what the participant would have received under social security. The recent proposal by Senator Phil Gramm (1998), for example, would guarantee that workers receive an annuitized benefit equal to 100 percent of what they would have received under social secu- rity plus 20 percent of the value of the investment they build up “over their working lives.” Unless the government reneges on this promise, fu- ture workers would have to be taxed on a pay-when-needed basis to make up for shortfalls. A minimum-benefit guarantee, therefore, represents an unfunded obligation that must be priced since money is not set aside ahead of time to cover the associated actuarial burden. This paper uses a simplified version of the model presented in Smetters (1998) to report that large pay-when-needed minimum-benefit guarantees can be very costly, so

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