The increasing life expectancy in the United States and in other industrial countries is creating a major problem for traditional unfunded social security pension programs. In such pay-as-you-go programs, the cost of providing any level of benefits varies directly with the ratio of retirees to employees. This book explores three issues: the administrative costs of a funded system, the distributional effects of shifting from a pay-as-you-go system to an investment-based system, and the market risks associated with any investment-based system. In particular, it examines whether social security can improve its future solvency problem via investments in private securities, the effect of investment risk on prefunding of social security, the effect of pay-when-needed minimum-benefit guarantees on the impact of social security privatization, and whether market and voting institutions can generate optimal intergenerational risk sharing. The book also looks at the social security trust fund, the riskless interest rate, capital accumulation, financial engineering and social security reform, and the role of real annuities and indexed bonds in an individual accounts retirement program.
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