BOSTON — Proposals to privatize the Social Security system ignore the risk inherent in investing in equities, a new study says.
President Bush has said the privatization of Social Security is one of his key legislative proposals for 2005. The issue is being hotly debated in Congress and elsewhere.
The study, written by Alicia H. Munnell, Steven A. Sass and Mauricio Soto, was published in January by the Center for Retirement Research at Boston College. Ms. Munnell is the director and Mr. Sass the associate director for research at the center; Mr. Soto is a graduate student in economics at Boston College.
"Yikes! How to Think About Risk?" first notes the confusion in how pension funds value their liabilities. When calculating a plan's funding status, accounting rules require using a low-risk rate tied to bonds. But when estimating the current year's pension expense, sponsors can use the expected return on pension assets, the paper says. Thus, higher equity allocations result in lower pension expense and higher profits.
That's fine when companies expect to continue their pension plans, but it's a bad idea when the plan sponsor is ill-equipped to hike contributions quickly or can offload the risk to workers, taxpayers or the Pension Benefit Guaranty Corp., the study says.