Release date: Feb. 3, 2005
Contact: Elaine Justice, Associate Director, University Media Relations,
at 404-727-0643 or elaine.justice@emory.edu

Social Security Proposal Combines Rewards and Risks

Emory economist Robert Chirinko says there are both rewards and risks in President Bush's proposal to use personal accounts funded from Social Security taxes to provide part of government retirement benefits.

"Laced throughout the discussions of Social Security reform is the notion that by shifting funds around, more will be available for retirement," says Chirinko. "This is true in some cases, but not with personal accounts. The reason personal accounts pay a higher return, as all financial economists know, is that the investments will be riskier. Higher return is accompanied by higher risk."

A person with a six-figure income can afford to take such risks, says Chirinko. Perhaps some middle-income earners can afford to do so as well. But for a large number of workers, he says, "it would seem unwise to take such risks. Am I characterizing the proposal as a shell game? Yes."

But there is a winner here, he adds. "A movement to personal accounts clearly favors higher earners. For those with substantial portfolios, the options afforded by personal Social Security accounts are tangible," says Chirinko. "They can afford the risk, and would welcome the return."

An important issue largely ignored in current discussions is that the Social Security program also is an insurance program, says Chirinko. "In general, insurance programs pay extra-large benefits to those who have suffered some reversal, such as a car accident or house damage. We all pay premiums, but only a few collect.

"Social Security is similar. We all pay. High earners do not get a market return on their contributions. But low earners -- who may be in this category for a variety of reasons not all of which are based on personal choices -- get more than they contributed. Under the current plan, there is a redistribution from upper income to lower income workers. Personal accounts cut against this redistribution/insurance."

As with the first point, weakening the insurance feature of Social Security will benefit the wealthy, he says.

Plus, administrative costs of the proposed plan will rise. "This too is not in doubt," says Chirinko. "Some high-income groups may find it wise to invest in exotic securities, and pay large administrative fees. For these extra fees, high-income groups are getting something they desire."

But the stock market does not always rise. "There are prolonged periods when the market falls substantially, 1971 to 1974 being a case in point," says Chirinko. "When -- not if -- such a prolonged period occurs, middle- to lower-income investors will see their retirement benefits shrink markedly."

Still, "the creation of personal accounts does not abolish the franchise," says Chirinko. Retirees will still want their benefits. "These suddenly poorer retirees/voters can and probably will lobby their congressional representatives for a bailout." Given AARP's clout, he says, no one should minimize the chances of this scenario unfolding.

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