Institute Professor Franco Modigliani

January 2003, MIT Sloan research page

President Bush's Commission to Strengthen Social Security has proposed three solutions to strengthen Social Security in the face of its uncertain future. Each would enable participants to transfer a portion of their Social Security contributions to individual mutual fund accounts.

The high costs involved in such an approach, however, would substantially reduce future benefits and would not relieve the government of the enormous cost of transitioning from a pay-as-you-go system to a funded system, according to Institute Professor and Nobel Prize recipient Franco Modigliani and two colleagues.

Writing an opinion piece in the winter 2003 issue of the MIT Sloan Management Review, Modigliani and coauthors Maria Luisa Ceprini and Arun Muralidhar propose replacing personal accounts with one common account that would invest its assets in a highly diversified indexed portfolio of stocks and corporate bonds.

They write that their plan, compared to the Bush proposals, would substantially reduce the cost to maintain the investments and, most importantly, would preserve defined benefits. Read the article.

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To read on, please visit http://mitsloan.mit.edu/smr. Reprints of MIT SMR articles are available.

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