
Contents
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6.1 Alternative Approaches to Risk Reduction 6.1 Alternative Approaches to Risk Reduction
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6.2 A Private Market Solution: Accumulated Pension Collars 6.2 A Private Market Solution: Accumulated Pension Collars
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6.3 An Annual Contract “No Lose” PRA Plan 6.3 An Annual Contract “No Lose” PRA Plan
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6.4 Simulating the Distribution of PRA Investment Outcomes 6.4 Simulating the Distribution of PRA Investment Outcomes
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6.5 Comparison of Alternative PRA Pensions Relative to the PAYGO Benchmark 6.5 Comparison of Alternative PRA Pensions Relative to the PAYGO Benchmark
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6.6 Tailoring the Guarantees to Individual Preferences with Zero-Cost Collars 6.6 Tailoring the Guarantees to Individual Preferences with Zero-Cost Collars
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6.7 Lower Cost Mixed Plans: Limiting the Tax Increase 6.7 Lower Cost Mixed Plans: Limiting the Tax Increase
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6.8 A Concluding Comment 6.8 A Concluding Comment
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References References
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Comment - David W. Wilcox Comment - David W. Wilcox
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Two Questions Two Questions
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Other Considerations Relevant to the Evaluation of PRAs Other Considerations Relevant to the Evaluation of PRAs
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Concluding Remarks Concluding Remarks
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References References
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8 Reducing Social Security PRA Risk at the Individual Level: Life-Cycle Funds and No-Loss Strategies
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6 Reducing the Risk of Investment-Based Social Security Reform
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Published:June 2009
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Abstract
This chapter presents a new market-based approach to reducing the risk of investment-based Social Security that could be tailored to individual risk preferences. With this new form of risk reduction, substituting an investment-based personal retirement account (PRA) for the traditional pure PAYGO plan could achieve both a significantly higher expected retirement income and a very high probability that the investment-based annuity would be at least as large as the PAYGO benefit. Simulations are used to derive the probability distributions of retirement incomes relative to the “benchmark” benefits specified in current law. The calculations of the expected utility imply that these risk reduction techniques can raise the expected utility relative to plans with no guarantee. The ability to do so depends on the individual's risk aversion level.
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