Most of the debate about the future of Social Security has focused on alternate ways to structure the asset accumulation phase of a reformed retirement system in order to ensure that individuals reach retirement age with sufficient wealth to finance their retirement. The most prominent legislative proposals for personal retirement accounts (PRAs) pay little attention to the payout phase, and even those that specify a design for this phase tend to follow the Federal Thrift Savings Plan in not mandating annuitization and not guaranteeing benefits for surviving spouses. Disregarding the design of the decumulation or "payout" phase of a reformed system is risky because this phase will largely determine whether the system delivers a level of retirement income security similar to that provided by Social Security: retirement benefit annuities that are inflation-indexed, that last as long as a beneficiary lives, and that are free from financial market risk.
In this AARP Public Policy Institute Issue Paper, Jeffrey B. Liebman of Harvard's John F. Kennedy School of Government comprehensively analyzes the annuitization of individual account assets and how to manage withdrawals from a system of PRAs. He estimates projected benefit levels for diverse demographic groups and analyzes both accumulation and payout decisions for alternate benefit structures for a reformed Social Security system which includes individual account plans. While it is possible to provide a level of protection similar to Social Security in such a system, he finds that it would be costly and require careful regulation. (67 pages)