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Report on Social Security Looks ahead to Payout

A new report on potential reforms to the Social Security system, published by the National Academy of Social Insurance, looks beyond much of the current debate to ask how money from personal accounts would be paid to retirees. Michael Graetz, Justus S. Hotchkiss Professor of Law at YLS and co-chair of the panel that wrote the report, says, "These are questions that must be answered." Though money from such accounts wouldn't be paid out for dozens of years, he says questions about payout "have to be answered in the legislation that establishes the private accounts. You can't wait until the people retire."

(The report, titled "Uncharted Waters: Paying Benefits from Individual Accounts in Federal Retirement Policy," is available through the NASI website.)

In examining how to structure the payout on such accounts, the panel identified a host of important questions, such as: Will retirees be able to take a lump sum payment from their accounts, or will they be required to purchase an annuity? Will people have access to their accounts if they become disabled? How will the accounts be handled in divorces? Will payout of traditional Social Security benefits have to change? For each question, the report describes the advantages and disadvantages of various approaches.

"The most important point about payouts at retirement is that risks don't stop when people retire, in fact they increase," says Graetz. He identifies several continuing risks: investment risk on accumulated capital, for instance; or the risk of outliving savings; or the inflation risk. These risks mean that the payout aspect of any new policy has to be carefully orchestrated. Says Graetz, "You have to think about dealing with risks after retirement the same way that you think about risk-spreading through diversification of investments pre-retirement."

The report looks one step further down the road, by considering the legal, regulatory, and fiscal response that may be required if private accounts are established. Graetz gives one example: "If you require annuities and then the annuity market becomes large--it's now very small--because you've got a lot of these accounts, there's a question of whether you continue to have regulation of the insurance companies that are providing these annuities by the states, as they now do, or whether the federal government has to come in and do some regulation of insurance companies."

The other co-chair of the panel was Kenneth S. Apfel, commissioner of Social Security in the Clinton Administration and a professor at the LBJ School of Public Affairs at the University of Texas. The panel included scholars, advocates, economists, and policy makers. John Langbein, Sterling Professor of Law and Legal History at YLS, was one of the panel members.

Though members of the panel had different opinions about whether to institute private accounts and what would be the best way to structure them, they didn't introduce their personal opinions into the report. They hoped that by examining a wide variety of approaches, the report would be useful to policy analysts and legislators no matter what kinds of accounts are instituted.

The panel worked for more than two years on the 200-page report, and Graetz says the fact that it was released in the midst of President Bush's campaign to implement private accounts was "completely serendipitous." Still, few others have started discussing payout yet. "But when these issues surface, this report is going to be a very important resource," says Graetz.