Social Security: Implementation Issues for

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E M P L O Y E E   B E N E F I T S ,   C O M P E N S A T I O N
                  A N D   P E N S I O N   L A W
                  Vol. 2, No. 13: July 26, 2001
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Editor:        PAMELA J. PERUN
               Urban Institute
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                      Topic of This Issue:
           Social Security: Implementation Issues for
                      Individual Accounts
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NEW and FORTHCOMING ARTICLES

"The Challenge to Financial Regulators Posed by Social Security
Privatization"
      Brooklyn Law Review, Vol. 64, P. 1043, 1998
     ROBERTA S. KARMEL
        Brooklyn Law School

WORKING PAPERS

"Multiple Choices: Property Rights and Individual Accounts"
PAMELA J. PERUN
Urban Institute

"Options for Administering Individual Accounts in Social
Security"
     LAWRENCE H. THOMPSON
        Urban Institute
        Executive Office Research

"Mutual Funds and Institutional Investments: What is the Most
Efficient Way to Set Up Individual Accounts in a Social Security
System?"
     ESTELLE JAMES
        World Bank
     GARY D. FERRIER
        University of Arkansas
        College of Business Administration
     JAMES SMALHOUT
        Hudson Institute
     DIMITRI VITTAS
        World Bank

"The False Promise of Social Security Privatization"
     JEFFREY A. MIRON
        Boston University
        National Bureau of Economic Research (NBER)
     KEVIN M. MURPHY
        University of Chicago
        National Bureau of Economic Research (NBER)

"Social Security Reform: Implications for Women"
     JOHN B. WILLIAMSON
        Boston College
        Department of Sociology
     SARA E. RIX
        AARP Public Policy Institute

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N E W and F O R T H C O M I N G Articles
_________________________________________________________________

"The Challenge to Financial Regulators Posed by Social Security
Privatization"
Brooklyn Law Review, Vol. 64, P. 1043, 1998

BY: ROBERTA S. KARMEL
Brooklyn Law School

Contact: ROBERTA S. KARMEL
   Email: Mailto:Rkarmel@brooklaw.edu
Postal: Brooklyn Law School
           250 Joralemon Street
           Brooklyn, NY 11201 USA
   Phone: (718) 780-7946
     Fax: (718) 780-0375

ABSTRACT:
This article discusses some of the regulatory reforms that might
accompany or follow social security privatization, especially if
such privatization takes a form that permits individuals to
choose their own investments in private investment accounts
similar to defined contribution plans. Substantive changes may
be made in the securities and other laws to ensure that equity
investments are not made in highly risky ventures. These changes
could involve a reconsideration of merit regulation, the
institution of company registration, greater regulatory scrutiny
of new financial products and more stringent safety and
soundness regulation. This article also discusses possible
jurisdictional changes in financial regulation involving a shift
of responsibility from the states to the federal government,
particularly in insurance regulation, and a general
consolidation of regulatory authority.

______________________________

W O R K I N G P A P E R Abstracts
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"Multiple Choices: Property Rights and Individual Accounts"

BY: PAMELA J. PERUN
Urban Institute

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=236842

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Paper ID: Urban Institute Working Paper
Date: June 2000

Contact: PAMELA J. PERUN
   Email: Mailto:pamela@planetnow.com
Postal: Urban Institute
           2100 M Street, NW
           Washington, DC 20037 USA
   Phone: (202) 261-5320

Paper Requests:
All Urban Institute publications (books, policy briefs, etc) and
Urban Institute Press books may be ordered from: Urban Institute
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Fax:202-467-5775; Toll-free:877-UIPRESS (847-7377);
Mailto:pubs@ui.urban.org http://newfederalism.urban.org/

ABSTRACT:
This paper begins a discussion of the appropriate property
rights system for individual accounts in Social Security.
Individual retirement savings accounts look simple but they are
simple only until a spouse or dependent child enters the
picture. Then more than one person has a potential claim against
the account. There's a belief that if Social Security has
individual accounts, the equity issues found in the present
system will magically go away. But individual accounts will
raise their own equity issues - not so much as between different
types of families as between different members of the same
family. At best, individual accounts are a zero sum game. Their
assets are finite. When the account must be divided, what one
person wins, another person loses. Family events such as divorce
and death may precipitate division and distribution of account
assets, considerably reducing the available retirement income.
Social Security does not currently have a system to define and
allocate competing interests to benefits. To implement
individual accounts, a system of property rights must be created
to manage the inevitable conflicts between the needs of the
individual for retirement income and other members for support.
This paper uses some familiar retirement schemes as models to
analyze the following basic issues. What property rights should
individual accounts have? Who should hold those rights? When and
how should those rights attach to benefits? How should those
rights be enforced? It also suggests four guiding principles for
a property rights system in Social Security.

Keywords: Social Security, Individual Accounts, Retirement,
Property Rrights

JEL Classification: J26, J33, J38, K34
______________________________

"Options for Administering Individual Accounts in Social
Security"

      BY: LAWRENCE H. THOMPSON
              Urban Institute
              Executive Office Research

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=256590

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           http://www.urban.org/retirement/briefs/2/BRIEF2_L.PDF
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Paper ID: Urban Institute Brief Series No. 2
Date: March 1999

Contact: LAWRENCE H. THOMPSON
   Email: Mailto:LThompso@ui.urban.org
Postal: Urban Institute
           Executive Office Research
           2100 M Street, NW
           Washington, DC 20037
   Phone: 202-261-5526
     Fax: 202-728-0232

ABSTRACT:
Individual accounts have become a popular feature in Social
Security reform proposals during the past several years.
However, the precise meaning of "individual accounts" is
unclear, as approaches vary greatly in their financing,
management, and structure. Proposals differ in large part
because some objectives conflict with others. Two such conflicts
are of particular importance: the implications of a centralized
administration and the implications of allowing workers to make
relatively unconstrained investment choices. Designing a system
of mandatory individual Social Security accounts involves
balancing these conflicting objectives.

This brief details how the Latin American, United Kingdom,
Swedish and federal Thrift Savings Plan models balance these
objectives. A decentralized approach like that followed in the
United Kingdom can offer workers a wide range of investment
choices and create an effective barrier to political
interference in fund management, but it is likely to mean higher
administrative costs. The Latin American model is almost as
expensive and offers workers fewer investment choices, but it
also minimizes the risk of low benefits as a result of poor
investment choices by workers. The relatively new Swedish model
aims to produce worker choice almost as great as that in the
United Kingdom but with lower administrative costs and more
consumer protection. This requires giving the government a
greater administrative role than in the U.K. or Latin American
models. Administrative costs can be lowered with more
centralized management of the process, most notably through the
Thrift Savings Plan model. These lower costs are possible,
however, in part because fewer investor services and investment
options are offered, and they include a somewhat greater risk of
political interference in investment management decisions. No
model is superior on all criteria. If individual accounts are to
be incorporated into the U.S. Social Security system, a
consensus will have to be developed about the proper balance
among these various objectives.

Keywords: Individual account, pension, worker choice,
investment, Thrift Savings Plan, Social Security

JEL Classification: H55, J26, J33, J38, P50
______________________________

"Mutual Funds and Institutional Investments: What is the Most
Efficient Way to Set Up Individual Accounts in a Social Security
System?"

      BY: ESTELLE JAMES
              World Bank
           GARY D. FERRIER
              University of Arkansas
              College of Business Administration
           JAMES SMALHOUT
              Hudson Institute
           DIMITRI VITTAS
              World Bank

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=227419

Paper ID: NBER Working Paper No. W7049
Date: March 1999

Contact: ESTELLE JAMES
   Email: Mailto:ejames3@worldbank.org
Postal: World Bank
           1818 H Street, N.W.
           Washington, DC 20433 USA
Co-Auth: GARY D. FERRIER
   Email: Mailto:gferrier@comp.uark.edu
Postal: University of Arkansas
           College of Business Administration
           BA418, Dept. of Economics
           Fayetteville, AR 72701 USA
Co-Auth: JAMES SMALHOUT
   Email: Mailto:smallhout@ix.netcom.com
Postal: Hudson Institute
           1015 18th Street, N.W.
           Washington, DC 20036
Co-Auth: DIMITRI VITTAS
   Email: Mailto:DVITTAS@worldbank.org
Postal: World Bank
           Country Economics Department
           Policy Research and External Affairs
           1818 H Street, N.W.
           Washington, DC 20433 USA

Paper Requests:
Full-Text downloads are available from SSRN Online for $5.

ABSTRACT:
One of the biggest criticisms leveled at defined contribution
individual account (IA) components of social security systems is
that they are too expensive. This paper investigates the
cost-effectiveness of three options for constructing funded
social security pillars: 1) IA's invested in the retail market
with relatively open choice, 2) IA's invested in the
institutional market with constrained choice among investment
companies, and 3) a centralized fund without individual accounts
or differentiated investments across individuals. Our questions:
What is the most cost-effective way to organize a mandatory IA
system, how does the cost of an efficient IA system compare with
that of a single centralized fund, and are the cost
differentials large enough to outweigh the other important
considerations? Our answers, based on empirical evidence about
mutual and institutional funds in the U.S.: The retail market
(option 1) allows individual investors to benefit from scale
economies in asset management, but at the cost of high marketing
expenses that are needed to attract and aggregate small sums of
money into large pools. In contrast, a centralized fund (option
3) can be much cheaper because it achieves scale economies
without high marketing costs, but gives workers no choice and
hence is subject to political manipulation and misallocation of
capital. Mandatory IA systems can be structured to get the best
of both worlds: to obtain scale economies in asset management
without incurring high marketing costs or sacrificing worker
choice. To accomplish this requires centralized collections, a
modest level of investor service and constrained choice. The
system of constrained choice described in this paper (option 2)
is much cheaper than the retail market and only slightly more
expensive than a single centralized fund. We estimate that it
will cost only .14-.18% of assets annually. These large
administrative cost savings imply a Pareto improvement so long
as choice is not constrained too much.'

______________________________

"The False Promise of Social Security Privatization"

      BY: JEFFREY A. MIRON
              Boston University
              National Bureau of Economic Research (NBER)
           KEVIN M. MURPHY
              University of Chicago
              National Bureau of Economic Research (NBER)

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=270245

Date: May 2001

Contact: JEFFREY A. MIRON
   Email: Mailto:jmiron@bu.edu
Postal: Boston University
           595 Commonwealth Avenue
           Boston, MA 02215 USA
   Phone: 617-353-4422
     Fax: 617-353-4449
Co-Auth: KEVIN M. MURPHY
   Email: Mailto:kevin.murphy@gsb.uchicago.edu
Postal: University of Chicago
           1101 East 58th Street
           Chicago, IL 60637 USA

ABSTRACT:
Social Security is the single largest transfer program in the
world. In 1999, Social Security paid $334.4 billion in benefits
to retired workers and their families and collected $396.4
billion in taxes (Board of Trustees 2000, p.6). More than 151
million persons worked in jobs covered by Social Security and
paid Social Security taxes, while more than 37.9 million
received benefits (Board of Trustees 2000, p.122). In 1998 more
than 90 percent of elderly households received social security
payments, and such payments provided more than half of total
income for 64 percent of individuals aged 65 and older living
alone (SSA 2000, pp.132, 134).

According to all observers, Social Security faces a long-term
financial problem. Although the Social Security Trust Fund
currently boasts a substantial balance and collects far more in
taxes than it pays out in benefits, this situation will change
over the next several decades as the Baby Boom generation hits
retirement age. By 2015 Social Security will be paying more
in benefits than it collects in taxes, and by 2039 the Trust
Fund will be exhausted, given current benefit formulas and tax
rates (Board of Trustees 2000, p.27).

Partially in response to this problem, but also to address
other concerns about Social Security, a growing chorus of
politicians, policy analysts, and economists advocates the full
or partial privatization of Social Security. Among politicians,
President George W. Bush has made partial privatization the
center-piece of his solution to the Social Security crisis.
Among economists, Harvard University's Martin Feldstein is the
most visible advocate of this approach (e.g., Feldstein and
Samwick 1997), but many others have endorsed some form of
privatization.1 Similarly, policy analysts at conservative and
libertarian think tanks also support privatization.2

Privatization means creating private, individual accounts in
which Social Security participants would put some or all of the
monies they would otherwise pay in Social Security taxes. One
common argument in support of this approach is that, since
stocks have historically paid a higher return than either the
government bonds held in the Social Security Trust Fund or
Social Security contributions themselves, allowing individuals
to purchase stocks rather than paying taxes will improve Social
Security's rate of return and thereby alleviate the impending
crisis.

In this paper we explain that privatization per se does
nothing to alleviate Social Security's impending fiscal
imbalance or improve Social Security's rate of return.
Privatization might have desirable consequences - as well as
negative ones - but for reasons independent of the alleged
crisis. Our goal is not to advocate for or against
privatization; we simply attempt to clarify what privatization
can and cannot accomplish in hopes of focusing debate on the
real issues.

______________________________

"Social Security Reform: Implications for Women"

      BY: JOHN B. WILLIAMSON
              Boston College
              Department of Sociology
           SARA E. RIX
              AARP Public Policy Institute

Document: Available from the SSRN Electronic Paper Collection:
http://papers.ssrn.com/paper.taf?abstract_id=252051

Paper ID: Boston College Working Paper No. 1999-07
Date: December 1999

Contact: JOHN B. WILLIAMSON
   Email: Mailto:JBW@bc.edu
Postal: Boston College
           Department of Sociology
           McGuinn Hall 424
           140 Commonwealth Avenue
           Chestnut Hill, MA 02467 USA
   Phone: 617-552-8530
     Fax: 617-552-4283
Co-Auth: SARA E. RIX
   Email: not available
Postal: AARP Public Policy Institute
           601 E Street NW
           Washington, DC 20049 USA

ABSTRACT:
Despite recent economic gains for women, a substantial gender
gap in financial security during old age remains, making women
more dependent than men upon Social Security. This paper
discusses the important role that Social Security plays in
providing for women's economic security. It also analyzes the
implications for women of several proposed changes in Social
Security policy, including the call for the partial
privatization of Social Security via the introduction of
individual accounts. Many of the proposals would have the effect
of asking women, particularly low-income women, to shoulder a
disproportionate share of the risks and burdens associated with
the changes.

Keywords: Social Security, retirement

JEL Classification: J26, J16

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