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How Earnings and Financial Risk Affect Private Accounts in Social Security Reform

Most analyses of private accounts assume constant lifetime average earnings and constant average rates of return to estimate future account accumulations, rather than actual earnings histories and annual returns. Combining the variability of wage histories with the risk associated with asset returns results in a wide range of performance of the private accounts, according to Thomas Hungerford, a Washington-based economic consultant formerly with American and Johns Hopkins Universities as well as the Government Accountability Office, the Office of Management and Budget, the Social Security Administration, and the Levy Economics Institute.

In this AARP Public Policy Institute Issue Brief, Hungerford finds a real possibility that all or most individuals can be worse off under a private account plan. In fact, lower lifetime earners have a 50 percent chance of receiving private account benefits that are below what they would receive under the current system. (12 pages)

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