Social Security Benefit Uncertainty under Individual Accounts

Abstract

Social Security reforms that include individual accounts change both the expected benefit and the benefit risk. This article uses a long‐term stochastic forecasting model to estimate the distribution of expected benefits under a simple individual account, recognizing uncertainties in the current system. Introducing individual accounts increases the overall variability of benefit levels relative to current law; indeed the standard deviations of expected benefit gains exceed the level of those gains. The increase in uncertainty about benefit replacement rates is even larger, however, because individual accounts partially sever the link between earnings and benefits in the existing system. (JEL H55)

Impact of the National Pension Fund on the Suitability of Elderly Pensions in Thailand*

“…Our research approach is motivated by the work of Ronald Lee and others, particularly Lee and Tuljapurkar (1998) and Lee et al (2003). Other examples of this stochastic forecasting approach include Feldstein and Ranguelova (2001) and Harris et al (2005).…”

The Impact of the National Pension Fund on the Suitability of Elderly Pensions in Thailand

“…Our research approach is motivated by the work of Ronald Lee and others, particularly Lee and Tuljapurkar (1998), and Lee, Anderson, and Tuljapurkar (2003). Other examples of this stochastic forecasting approach include Harris, Sabelhaus, and Simpson (2005), and Feldstein and Ranguelova (2001).…”

Risk tolerance and retirement income composition

“…While both sides debate potential risks and returns from individual accounts, it is important to note that the existing system also has risk : uncertain demographics, earnings histories and worker behavior makes projections of the system difficult to quantify precisely. As such, our estimates utilize the stochastic feature of our model to measure the level of uncertainty inherent in Social Security projections (Congressional Budget Office, 2005b ;Harris et al, 2005).…”