Gerald P. Dwyer Jr.
Economic Review, Vol. 90, No. 3, 2005
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In the ongoing debate over Social Security, private accounts have been recommended as one part of the resolution of the funding difficulties the system faces in coming years. This article discusses what private accounts can and cannot do for individuals who choose to use them and for future Social Security deficits.
Under current proposals, private accounts would give account holders personal ownership rights and could be willed to heirs at death. Most proposals would limit the range of assets that can be held but would permit account owners to determine their investments based on personal risk preferences. To the extent that financial asset returns can be higher than returns on Social Security, private accounts can be more worthwhile for those with a longer time until retirement because any difference in returns can compound over a longer period.
Private accounts carry the risks inherent in holding financial assets, but Social Security carries a real risk of lower benefits in the future. Holders of private accounts would be trading one type of risk for another.
The creation of private accounts can reduce Social Security's future problems if the reductions in benefits in exchange for deposits in private accounts reflect the initial deposit plus interest earned.
August 2005