Guaranteeing Individual Accounts

Abstract

Global aging is prompting workers and taxpayers everywhere to recognize their vulnerability to the inherent uncertainty of unfunded social-security systems. This has generated an international wave of social-security reforms over the last two decades, prompting more than 20 countries to establish Individual Account (IA) plans. In the United States, the idea of Individual Accounts has attracted recent interest with the release of the Final Report of the President's Commission to Strengthen Social Security (CSSS): here, voluntary individual accounts were proposed as a key element of a reformed national old-age system (see Commission to Strengthen Social Security, 2001; John F. Cogan and Mitchell, 2003). Strengths of IA's include the fact that participants gain ownership in their accounts and diversify their pension investments; nevertheless, IA participants also must bear capital-market risk. Recent market volatility has reminded investors of the importance of capital-market fluctuations and their potential impact on retirement income. In response, some policymakers have suggested that be designed to help protect IA investments. Abroad, such guarantees have been adopted in several Latin American countries undergoing reform, and most recently, in Japan and Germany (Mitchell and Kent Smetters, 2003). Sensible public policy recommending the adoption of guarantees must identify their costs and who will pay for them. In this paper, we discuss how to evaluate such costs in the context of a social-security reform that includes IA's, along with ways to finance them.