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Social security personal-account participation with government matching

Published online by Cambridge University Press:  04 July 2005

GARY V. ENGELHARDT
Affiliation:
Department of Economics and Center for Policy Research, Maxwell School of Citizenship and Public Affairs, Syracuse University, Syracuse, NY 13244 (e-mail: gvengelh@maxwell.syr.edu)
ANIL KUMAR
Affiliation:
Research Department, Federal Reserve Bank of Dallas, Dallas, TX 75201 (e-mail: anil.kumar@dal.frb.org)

Abstract

This paper examines the potential impact of government matching contributions on personal-account participation in the President's Commission on Strengthening Social Security's Model 3 for Social Security reform. Given the government's choice of four plan-design parameters, the magnitude of the match is determined solely by the differential return personal-account assets receive above the notional return, referred to as the ‘personal-account premium’, akin to the equity premium. The impact of matching on personal-account participation is simulated for older workers (ages 40 to 65) in the first wave of the Health and Retirement Study (HRS) using empirical estimates from a structural model of the impact of employer matching on participation in corporate 401(k) plans. For a personal-account premium of three percentage points, which implies a match rate of 7.5% for middle- to lower-income workers, the simulations imply that 72% of mid-career and older workers would participate in voluntary personal accounts. The response of participation to matching is very inelastic; it seems not unlikely that participation by mid-career and older workers would achieve the mid-range assumption by the Commission of 67%. There is substantial heterogeneity in participation across subsets of older workers: participation would be the lowest for low-educated, minority, female, and unmarried mid-career and older workers.

Type
Articles
Copyright
© 2005 Cambridge University Press

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