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1. Introduction
Recent Social Security reform efforts focus predominantly on the establishment of personal retirement accounts either to supplement or partially replace the current Social Security program. Unlike the traditional Social Security system, which is based on a defined benefit model, the personal accounts created under these proposals would function like defined contribution plans. Contributions would be made to the accounts during working years, and balances would accumulate until retirement.
An important issue related to these personal accounts is whether they will redistribute income and how any redistribution compares to that under the current Social Security system. The answer depends in part on how personal accounts are dispersed upon retirement. In particular, it depends on how mandatory annuitization would impact different groups, especially those with shorter life spans, and whether certain annuity features would offset the drawbacks associated with forcing even those with short life expectancies to annuitize.
In this paper, we present a first step toward answering these questions. We use the Urban Institute's Dynamic Simulation of Income Model (DYNASIM), which projects Social Security outcomes through 2050, to examine model 1 of the President's Commission to Strengthen Social Security. We first examine how that system of personal accounts would affect groups differently by comparing the distributional impacts of a personal accounts system to those under the current system. We then examine how different strategies for annuitizing personal account balances might change these distributional impacts. Of particular interest is whether certain annuity features can benefit workers with shorter life spans. We also examine how different annuitization features can affect post-retirement income and poverty rates.
Under current law, women and less educated and lower income persons tend to gain relative to men and more educated and higher income persons. We find that personal accounts would reduce some aspects of this redistribution by tying benefits more closely to work histories. Any program that pays benefits in the form of life annuities, including the current Social Security program, transfers resources from those with shorter life expectancies to those with longer life expectancies. We find, however, that certain annuity features, such as joint and survivor annuities, period certain annuities, and cash refunds, can reduce the size of these transfers. Annuitizing balances only up to the point that they produce a poverty level income can also benefit individuals with shorter life spans.
Although the choice of a particular annuitization strategy will change the distribution of benefits, we find that the total amount of Social Security benefits, including both the traditional benefit and the annuitized benefit, do not vary a great deal from one strategy to another. As long as the offsets made to the traditional benefits are calculated using the same features as the personal account annuities, the pattern of these offsets will help reduce the differences in annuity benefits received.
In section 2 below, we provide background on Social Security personal account proposals. This is followed by a discussion of redistribution in the current Social Security system and the potential impact of personal accounts on redistribution. Section 4 provides background information on annuities, including the redistributive aspects of annuitization. Section 5 outlines our analysis methods, and section 6 presents the results. We provide our concluding remarks in section 7.
Note: This report is available in its entirety in the Portable Document Format (PDF).
Acknowledgments
The research reported herein was performed pursuant to a grant from the U.S. Social Security Administration (SSA) to the Center for Retirement Research at Boston College (CRR). The opinions and conclusions are solely those of the authors and should not be construed as representing the opinions or policy of SSA or any agency of the Federal Government or of the CRR. Likewise, they do not necessarily reflect the opinions of the Urban Institute, its board, or sponsors. The authors gratefully acknowledge programming assistance from Donald Alderson, guidance on annuitization issues from Sandy McKenzie, and helpful comments on an earlier version from Sheila Zedlewski. Direct correspondence to Uccello at The Urban Institute, 2100 M Street, NW, Washington, DC 20037 or cuccello@ui.urban.org.
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