Reforming Social Security: Issues and Challenges for Personal Retirement Accounts

Abstract

We seek to analyze a number of important issues related to the ownership of government pensions. In the United States, Social Security is operated on a pay-as-you-go basis, with some limited pre-funding to prepare for the baby boom retirement. Moving toward more of a defined contribution system will require accounting for many details. Social Security will still need to find ways to cover its unfunded liabilities to past and present retirees, as well as to workers who have paid into the system. There are also many issues which will need to be clarified regarding the ownership of personal accounts: will participation be voluntary or mandatory, will annuitization be required, and how freely can participants choose their investment strategy. An assessment of personal accounts must also fully incorporate the role of disability benefits and survivor benefits. Finally, what will happen in the new system if the accounts do not achieve their expected returns? We use the example of the United States to highlight many important issues faced by countries looking to use defined-contribution pensions as a response to aging populations.