Discussion of
Made Poorer by Choice: Worker
Outcomes in Social Security vs. Private
Retirement Accounts
By Ahmed, Barber, and Odean
AFA Annual Meetings
Philadelphia PA, January 2013
Jonathan A. Parker
MIT Sloan
Outline
A. Summary
B. Comments on the paper
C. Comments on the benefits and costs of
privatizing Social Security
A. Summary: The paper compares
retirement wealth across policies
o Sample: CORSIM panel of 1979 cohort, with
projected income, demographics, mortality
o Social Security: 15% tax from now on, and
current benefit formulas (balances to 2080)
o Private Retirement Accounts (PRAs):
• 9.36% of earnings into PRA and 5.64% to pay
promised benefits of others
• Stochastic returns on PRA’s
• Fair annuity at retirement (but macro risky)
• Three different assumptions about portfolios . . .
Portfolio “choice”
1. PRA portfolio’s fixed 60/40 stock index/bond
2. PRA portfolios are distributed in stock index vs.
bond portfolios as in current 401k’s etc. in SCF
3. Individual returns vary as in tax-deferred
accounts at a large US brokerage 1991-1996
The main findings
Pct of households with:
1.
2.
3.
Lower PRA
wealth than SSS
wealth at age 68
60/40 stock/bond:
20.4
Observed stock index vs.
bond allocations:
26.1
Observed hh-level returns:
37.4
Welfare (γ=3.8)
Lower PRA
welfare than
SSS welfare
53.8
67.5
99.8
B. Comments on the paper
1.
Follows from existing puzzles: high fees and dispersed
returns in mutual funds; lack of hh diversification
2. The experiment is not privatize and re-optimize
–
–
If people viewed SSS as bond-like, then they might replace
with bonds in portfolio; might also save/consume
differently
Could match distribution of returns to hh characteristics
3. Two welfare (philosophy) assumptions:
–
–
Revealed preference = revealed welfare
Expected utility even though behavior ‘inconsistent’ with
objective
4. Suggestion: maintain the same aggregate asset supplies
across PRA scenarios
–
–
Privatization of Social Security is a general equilibrium
issue
Lack of optimization makes general equilibrium feasible
C. Possible costs and benefits of
privatizing Social Security
1. Can privatization increase welfare?
a) Give individuals the value of their accrued benefits in
private accounts holding Treasuries
b) Issue explicit US debt to fund, and require future
contributions to these accounts at the SS tax rate
c) Tax accounts to maintain debt on same path as before
including implicit debt.
 No increase in return on SS accounts, same benefits!
 Same general equilibrium
2. Add the ability to choose investments
a) Why is a dollar of stock worth more than a dollar of
gov’t debt?
See: Geanakoplos, Mitchell, Zeldes (1999)
Why is a dollar of stock worth more
than a dollar of gov’t debt?
1. Some households unable to participate in
the stock market
– With privatization, people can invest what was
Social Security wealth into stocks and get
exposure to, and high returns of, stock market
2. Additionally: prices adjust, equity return
falls, and capital allocated more efficiently
Other possible benefits
• Veil of ignorance and an increase in
national saving
• Political economy of underfunding and tax
smoothing/crises (See: Novy-Marx and Rauh)
Costs of privatization
• Fees and advertising and administration
– Chilean example:
• Government on the hook for funds that lose money
• “pension funds retain between a quarter and a third
of workers' contributions in the form of
commissions, insurance and other administrative
fees” (pre 2008 Velasco reform)
– SSS administratively inexpensive
• Countries that have privatized have not
seen increases in national saving (Samwick)
Conclusion
Why do we have social security?