Partial Privatization of Social Security

A Simulation of Possible Outcomes and Risks to Workers

Abstract

Social Security reform as put forward by the President's Commission on Strengthening Social Security (2001) includes three model proposals each of which contain voluntary privatized accounts. Opting for private savings incurs the penalty of losing benefits that accrue in a set-aside account. Three simulations were run using Monte Carlo simulation based on historical distributions of stock and bond returns. These simulations projected end-of-period savings under different market conditions for Model 2, the only model projecting elimination of Social Security deficits. In all cases the average privatized account accumulations were greater than the set-aside benchmark account; however, the probability of falling below the set-aside account’s lost benefits range from a low of 13% to a high of 309c. The considerable probability of failing to exceed a lost-benefits account will be an important consideration for workers in determining whether or not to exercise the option to participate.