Risky business? Evaluating market risk of equity investment proposals to reform social security

A number of options have been proposed to address the expected financing sh ortfall of Social Security in the next century Most basic aspects of the va rious reform proposals are captured by the three options offered by the Adv isory Council on Social Security in 1996. Common to all three options is th at they would permit either public or private equity investment. This artic le discusses the economic risks involved in public and private equity inves tments as a funding solution for Social Security. To quantify the risks inv olved in equity investment, stochastic simulations are based on the economi c assumptions of the 1998 Trustees Report of Old Age and Survivors Insuranc e and Disability Insurance in combination with different assumptions about the rates of return on bonds and stocks. For public equity investment? , fi nancial market risk remains significant for at least 40 years. For individu al accounts, I find that the chance of doing worse than with Social Securit y or of falling into poverty in retirement is generally high, yet varies wi th income level, gender, family status, and employment history. In general, zz,omen, married workers with dependent spouses, or workers with incomplet e work histories fare worse than men, single workers, or workers with compl ete work histories when compared either to the current system or to the pov erty line. (C) 2000 by the Association for Public Policy and Management.