Gambling with Retirement: Market Risk Implications for Social Security Privatization

Abstract

Under Social Security privatization, workers would be allowed to divert some of the money that currently goes to Social Security into private accounts. This would expose them to market risk, that is, the risk of a substantial drop in equity prices or of a prolonged bear market. This could result in generations of workers with less money than they thought they would have for retirement. A privatized system could require the government to intervene, for example, by expanding social programs. The primary alternative to a government bailout of the Social Security system, older workers working longer, would create enormous labor market pressures. Other alternatives, such as working longer or diversification, also encounter obstacles. Many middle-class families affected by market risk already save too little for retirement, and optimal diversification may prove too costly for many low- and moderate-income households.