| Abstract: |
This paper examines the potential impact of government matching contributions
on personal-account participation in the President's Commission on
Strengthening Social Security's Model 3 for Social Security reform. Given the
government's choice of four plan-design parameters, the magnitude of the match
is determined solely by the differential return personal-account assets
receive above the notional return, referred to as the "personal-account
premium," akin to the equity premium. The impact of matching on
personal-account participation is simulated for older workers (ages 40 to 65)
in the first wave of the Health and Retirement Study (HRS) using empirical
estimates from a structural model of the impact of employer matching on
participation in corporate 401(k) plans. For a personal-account premium of
five percentage points, which implies a match rate of 12.5 percent for middle-
to lower-income workers, the simulations imply that 53 percent of older
workers would participate in voluntary personal accounts. The response of
participation to matching is very inelastic; it is very unlikely that
participation by older workers would achieve the mid-range assumption by the
Commission of 67 percent. There is substantial heterogeneity in participation
across subsets of older workers: participation would be the lowest for
low-educated, minority, and unmarried older workers. |