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: 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

Pct of households with:Lower PRA Lower PRA wealth than SSS welfare than wealth at age 68 SSS welfare 1.60/40 stock/bond: Observed stock index vs. bond allocations: Observed hh-level returns: Welfare ( γ=3.8 ) The main findings

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

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) C. Possible costs and benefits of privatizing Social Security

Why is a dollar of stock worth more than a dollar of gov’t debt? 1.Some h ouseholds 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?