Social Security and Individual Accounts as Elements of Overall Risk-Sharing

Abstract

The widespread public and political impetus, in the United States and elsewhere, to revamp social security to incorporate some form of individual accounts creates a time of opportunity. It is a time when people want to see the better exploitation of the available trade-off between risk and return and a time to reconsider the foundations of the social-security system so that it can much better serve its intended purpose as a manager of risks. As I argue in my new book, The New Financial Order: Risk in the 21st Century (Shiller, 2003), the time when we redesign social security ought to be a time when we carefully consider the fundamental intergenerational risk-management problem and define choices in individual accounts that reflect the true problem. It is also a time when we must make creative use of insights from behavioral economics that have emerged over the years. Finally, it is a time for an expanded exploitation of our new electronic information technology. We should not miss this opportunity. This means we must work now toward solving a complex constrained optimization problem where the objective is to maximize a social welfare function involving all generations and the constraints reflect the varying degrees of individual optimization ability, psychological underpinnings of human behavior, and modem information technology.

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