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Published by Medill in North Carolina Law Review (2003) 81. Copyright 2003, University of North Carolina School of Law. Used by permission.


This Article discusses the final recommendations of the President's Commission to Strengthen Social Security concerning the proposed creation of a system of personal Social Security accounts. The Article critically evaluates the Commission's findings (the four "Truths") in light of numerous research studies concerning participant-directed 401(k) plans. The Article claims that Truth #1, the assertion that all workers will be better off in terms of total benefits from the combination of traditional Social Security and personal account benefits, is based on unrealistic assumptions concerning how workers choose to diversify their investments. The 401(k) plan research evidence suggests that, due to their choice of investments, many workers are unlikely to earn the Commission's assumed rate of investment return on personal Social Security accounts. Truth #2, the assertion that a government-sponsored program of investment education will change worker investment behavior and lead to improved investment performance, is contradicted by recent research showing that an investment education program for 401(k) plan participants generally is ineffective in changing investment behavior. The Article claims that Truth #3, the assertion that personal accounts will provide the opportunity for low-income and minority workers to "build wealth," is misleading for two reasons. First, low-income workers who survive to retirement will be forced to annuitize all of their personal account assets to satisfy the Commission's minimum retirement income standard. Second, the Commission's proposed structure gives rise to adverse selection, the costs of which will fall most heavily on low-income workers. Finally, the Article addresses Truth #4, that personal accounts will be structured so that large sums of money (and its related power) will not be concentrated in the hands of a few government bureaucrats and money managers. The Article argues that to attain the high rates of worker participation necessary to achieve sustained popular and political support for a personal account system, the system must adopt an enrollment approach patterned after automatic enrollment 401(k) plans. Recent research studies of automatic enrollment 401(k) plans show that automatically enrolled participants have a strong tendency to remain "stuck" in the plan's default investment fund. The Article claims that workers in a personal account system will do the same, thereby resulting in: (1) political pressure for an investment strategy for the default fund that furthers social policy goals, rather than maximizing investment returns; and (2) a potentially troublesome concentration of assets in the system's default investment fund.

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