Question
13-8 Periodically, a group recommends privatizing social security. Privatization converts the Social Security system for current workers to a 401K plan, where each worker pays
13-8 Periodically, a group recommends privatizing social security. Privatization converts the Social Security system for current workers to a 401K plan, where each worker pays into his or her own individual retirement account. Workers could decide how to invest their savings within their individual retirement accounts. At retirement, workers will withdraw their funds and thus finance their own retirement. With the above as background, consider the following proposal for a private social security plan. Workers are required to put 10% of their earnings into a government-operated retirement fund. Workers may put the funds into one of three investments: a diversified U.S. equity fund (a mutual fund of stocks traded on the U.S. stock market), a diversified bond fund, or a diversified international equity fund. Government would guarantee a minimum rate of return of 5% per year to each worker/investor and investors could earn and retain up to 6% in a year. (Government would keep returns over 6% to help finance the guaranteed 5% return.) Workers may not borrow from their fund. Comment on whether such a plan would allow income redistribution from wealthier retirees to less well-off retirees compared to the current SS system?
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