Social Security Benefit Uncertainty under Individual Accounts

Amy Rehder Harris, John Sabelhaus, Michael Simpson , Contemporary Economic Policy 23(1) , 1-16 , January 2005.

Social Security reforms that include individual accounts change both the expected benefit and the benefit risk. This article uses a long-term stochastic forecasting model to estimate the distribution of expected benefits under a simple individual account, recognizing uncertainties in the current system. Introducing individual accounts increases the overall variability of benefit levels relative to current law; indeed the standard deviations of expected benefit gains exceed the level of those gains. The increase in uncertainty about benefit replacement rates is even larger, however, because individual accounts partially sever the link between earnings and benefits in the existing system.

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