[cover]

Social Security and the Stock Market

How the Pursuit of Market Magic Shapes the System

Alicia H. Munnell and Steven A. Sass
Center for Retirement Research at Boston College

Introductory chapter | Table of Contents

“The 1994–1996 Social Security Advisory Council, which I chaired, recommended three different approaches for using equity investments to help solve the long run Social Security fi nance issue. As it happens, the United Kingdom, Australia, and Canada have taken steps that roughly parallel the three approaches. Munnell and Sass evaluate the experience in these three countries. Their conclusions may not be the conclusions of everybody else, but this is a very interesting book and everybody else should read it.”

Edward M. Gramlich, Senior Fellow, Urban Institute;
Professor Emeritus of Economics and Public Policy, University of Michigan

“Optimal social security design needs to look at the tradeoff between risk and return of retirement benefits. Munnell and Sass provide an excellent and lucid exposition of the issues which arise when seeking higher returns through riskier benefit designs. This is the book to turn to in order to review international experience so as to understand the pluses and minuses of equities.”

J. Michael Orszag, Head of Research, Watson Wyatt LLP

“I’ve seen fi rst hand the importance of using equities to fund national retirement income programs. Munnell and Sass make a fresh and extremely valuable contribution by providing perspective on how equities have been included in the past—primarily through employer defi ned benefi t pension plans— and how policy makers are now attempting to incorporate equities into Social Security programs.”

Annika Sundén, Senior Economist, Swedish National Social Insurance Board

“Setting this analysis of the reform experiences in Australia, Canada and the UK in the context of the histories and projections of their retirement programs makes the analysis valuable for anyone wanting to learn from their experiences for future U.S. reform.”

Peter Diamond, Institute Professor of Economics, Massachusetts Institute of Technology

“Highly recommneded reading for practicing pension policy advisers and aficianados around the world.”

Journal of Pension Economics and Finance
The U.S. retirement income system faces an enormous challenge as the transition to a much older society begins. Fewer employers sponsor traditional defined benefit pension plans. Their replacement, the now dominant defined contribution (e.g., 401 [k]) plans, are failing to produce the accumulations that baby boomers will need for a secure retirement. And the backbone of the retirement income system, Social Security, faces a long-term shortfall. This situation has policymakers looking for new funding options. One such option gaining support is investing a portion of Social Security funds in potentially higher-yielding equities.

Munnell and Sass explore whether equities could help solve the woes facing the U.S. retirement income system in general, and the Social Security shortfall in particular. They examine the experiences of three nations that added equities to the investment mix of their retirement systems—the U.K., Australia, and Canada. As these experiences show, while equities promise higher returns than government bonds, how they are implemented—as add-ons, carve-outs, or as trust fund supplements—matters greatly.

The book begins with a description of how retirement systems in industrialized nations emerged as a response to several common problems, namely aging workers’ inability to continue to generate earnings and to accumulate assets that would afford a secure retirement. Next, the authors discuss the challenges facing the U.S. retirement income system, including how solvency issues surrounding employers’ plans have been ineffectively addressed and the move away from defined benefit programs to defined contribution programs and the risks inherent in this move.

From there they review the three nations’ experiences with equities and the political and practical issues associated with each approach. They begin with the U.K., which introduced equities using the carve-out approach. Next, they examine Australia, which added equities using the add-on approach. Australia also added mandatory contributions to individual retirement savings accounts, which could be invested in equities. Finally, they review Canada’s efforts to reform its retirement income system by adding equities using the trust fund approach. Lessons are drawn from each country’s experience and Munnell and Sass explain why they think that the approach taken by Canada offers the most promise for the U.S. Social Security program.

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    • The authors’ international comparisons also reveal important conclusions relating to the size of benefits, the cost of retirement income programs, and the ability of both individuals and trust funds to manage investment risk.
    171 pp. 2006.
    $40 cloth ISBN 0-88099-291-3 / ISBN-13 978-0-88099-291-6
    $18 paper ISBN 0-88099-290-5 / ISBN-13 978-0-88099-290-9

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