Changing Progressivity as a Means of Risk Protection in Investment-Based Social Security. Andrew Samwick Dartmouth College and NBER October 21, 2006. That’s Quite a Mouthful What Does It Mean?.
Andrew SamwickDartmouth College and NBEROctober 21, 2006
These differences are in Equities.”
These differences are
very important.Figure 1: Changing Progressivity
With SSA’s equity premium, in Equities.”
high equity allocations
aren’t the problem.Figure 2: Shifting from Bonds to Equity
Even these differences in Equities.”
are not particularly large.And with 2% off the equity premium
Cut by 40% in Equities.”
Increase Progressivity, Decreasing Variation
Decrease Bond Share
Increasing Equity Share
Raising Expected Benefits
(56 – 10)/90 = 51% in Equities.”
How Much Equity Risk Can Be Avoided?
(72 – 10)/90 = 69%
With less risk aversion, the all-equity portfolio dominates, and greater progressivity would not enable investors to shed much equity risk.
With more risk aversion, the optimal equity portfolio shares fall from 90% to 80% or 70% as progressivity increases, and greater progressivity could enable investors to shed all or almost all equity risk.
Knocking 100 basis points off the equity premium has analogous effects as increasing risk aversion: slightly lower equity allocations are optimal, and all or almost all equity risk could be shed with higher progressivity.
With larger PRAs, optimal equity allocations fall from 90% to 80%, and greater progressivity facilitates shedding about the same proportions of equity risk (half and two thirds).