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Uncharted Waters

Uncharted Waters: Paying Benefits From Individual Accounts in Federal Retirement Policy

Kenneth S. Apfel
Michael J. Graetz
Copyright Date: 2005
Pages: 224
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  • Book Info
    Uncharted Waters
    Book Description:

    In the debate over Social Security reform, most of the work on individual accounts has focused on how individuals would save and manage those accounts during their working lives. Uncharted Waters goes further and addresses the often neglected questions about how and under what circumstances funds could be withdrawn from these accounts. In Uncharted Waters, a panel of recognized experts created a framework for determining how benefits might be paid if private accounts become a new part of the Social Security system or are created separate from Social Security. This important volume analyzes the potential implications of different policy choices. It considers the ramifications of payout rules for families at different stages of life, particularly for economically disadvantaged groups. The contributors also address how any new individual account program would fit with traditional Social Security, employer-based pensions, and tax-advantaged individual retirement savings (401(k)s and IRAs). As the debate over individual savings accounts rages, Uncharted Waters offers a sound framework for informing public policy on both sides of the argument.

    eISBN: 978-0-8157-9771-5
    Subjects: Political Science, Finance

Table of Contents

  1. Front Matter
    (pp. None)
  2. Preface
    (pp. i-ii)
    Kenneth S. Apfel and Michael J. Graetz
  3. Uncharted Waters Study Panel
    (pp. iii-iv)
  4. Table of Contents
    (pp. v-vi)
  5. List of Figures
    (pp. vii-viii)
  6. Chapter 1 Introduction and Summary
    (pp. 1-22)

    Calls for new individual savings accounts as part of federal retirement policy have come from various quarters, either as part of some Social Security reform proposals or as saving vehicles for individuals who do not have access to employer-sponsored pensions. Individual development accounts and other initiatives to help low-income people save also demonstrate growing public interest in the issue.

    Much of the work on individual accounts as part of Social Security proposals has focused on how individuals would save and manage the assets in the accounts during their working lives. Less attention has been paid to how and under what...

  7. Chapter 2 Financial Demographics
    (pp. 23-44)

    Understanding how Americans save—or do not save—is critical groundwork for any new initiative on workers’ retirement income. Millions of people (most of them low-income and/or minority) have no relationship with a mainstream financial institution. Many more, including middle-income families, have saved little for retirement and can be expected to depend almost entirely on Social Security for retirement income.

    This chapter examines the components of income for Americans age 65 and older—including Social Security, employer-sponsored pensions, individual savings, and earnings from work—and the relative role these sources of income play for individuals at different income levels. Several...

  8. Chapter 3 Payments at Retirement
    (pp. 45-74)

    Retirement creates a new set of financial risks for any individual. Policymakers designing an individual account system must decide how, and to what extent, to protect retirees against vulnerabilities. Some protections might require constraining individual choice through rules that limit or regulate a retiree’s access to account funds. In this regard, when and how payments would be made to account holders during retirement are key policy questions in individual account design.

    This chapter describes the financial risks that retirees face. In light of these risks, the chapter sets out a framework policymakers might use in analyzing individual account proposals. A...

  9. Chapter 4 Institutional Arrangements for Providing Annuities
    (pp. 75-96)

    A life annuity is an insurance product that promises payments for as long as the annuitant lives. Chapter Three explored how policymakers might set rules for workers to withdraw funds from their individual account at retirement. One policy option would grant retirees broad latitude to withdraw funds as they wish, as is common in voluntary, supplemental retirement savings plans in the United States. To date, when retirees are given these choices, few buy life annuities. Other policy options would place much more emphasis on the purchase of life annuities at retirement. Proposals that view the proceeds from the accounts as...

  10. Chapter 5 Pre-Retirement Access to Individual Accounts
    (pp. 97-116)

    Individual savings accounts for retirement pose an essential question: would workers have access to the money in the accountsbeforeretirement? If so, what limitations would there be on pre-retirement access to the funds? This chapter reviews issues that might influence the rules for early access to the funds, including the various precedents and options for access rules.

    Four options are presented for access rules before retirement.Option One: Broad Early Accessallows unconstrained access to the funds and is based on the precedent of Individual Retirement Accounts (IRAs).Option Two: No Early Accessis at the other end of...

  11. Chapter 6 Spousal Rights
    (pp. 117-142)

    Amid all the work on creating individual Social Security accounts for retirees, policymakers have paid less attention to individuals whose eligibility for Social Security benefits is based on family relationship or disability. This is an important oversight, as about half of all beneficiaries have their eligibility based on family status or disability. This chapter focuses on the rights of spouses. The next two chapters focus on disabled workers and children, respectively.

    This chapter reviews spousal rights precedents found in Social Security, in state family law, and in federal rules that apply to retirement plans other than Social Security. It also...

  12. Chapter 7 Disabled Workers and their Families
    (pp. 143-156)

    When considering individual accounts as part of Social Security, it is important to take account of disabled-worker beneficiaries¹ and their families. In 2003, about 16 percent of all Social Security beneficiaries were disabled-worker beneficiaries and their dependent children or spouses. Changes in basic disabled-worker benefits would affect other beneficiaries, including former disabled workers who are reclassified as retirees when they reach normal retirement age, children and widowed spouses of deceased disabled workers, widows in old age who receive benefits based on the work record of a spouse disabled before he died, and disabled adult children who receive benefits based on...

  13. Chapter 8 Children, Life Insurance, and Bequests
    (pp. 157-168)

    Individual accounts as part of Social Security reform are generally designed with retired workers in mind. Less attention has been paid to beneficiaries whose eligibility is based on a family relationship or disability. The previous two chapters focused on rights of spouses and on benefits for disabled workers within an individual account system. This chapter focuses on children, both minor children and those disabled adult children who receive benefits on the basis of their parents’ work history.¹

    Social Security is most commonly known for paying retirement benefits to workers who have contributed to the system throughout their working careers. But...

  14. Chapter 9 Worker-Specific Offsets
    (pp. 169-188)

    Certain proposals for Social Security individual accounts would allow workers to shift part of currently scheduled Social Security taxes to these accounts. These proposals generally provide measures to compensate the Social Security trust funds for the loss of this revenue, which is necessary to pay current benefits. This compensation could take the form of additional revenue (such as transfers from general revenues, increased taxes, or dedicating specific tax revenue to Social Security) or reduced future benefits, or some of both. Proposals with mandatory account participation could provide this compensation in a number of ways, including across-the-board benefit reductions that are...

  15. Chapter 10 Individual Account Taxation
    (pp. 189-210)

    The tax treatment of individual accounts can have a dramatic impact on the costs, participation levels, forms of payout, and benefits and burdens associated with them. Tax issues are further complicated because one cannot understand how to tax payouts from individual accounts without understanding how contributions to the accounts are taxed. This is true because of “tax equivalences.”

    In brief, policymakers can tax or exempt income at three different points in the saving process: they can tax deposits, investment earnings, and/or withdrawals. An income tax generally taxes savings deposits and investment earnings but not withdrawals. A consumption tax, however, can...

  16. Glossary
    (pp. 211-216)
  17. References
    (pp. 217-224)
  18. Back Matter
    (pp. 225-225)