Gives Samuelson Award to Authors of
Path-Breaking Study on Social Security Reform

Work Provides Tools to Critically Examine Range of Proposals
Costs and Risks Found Understated

NEW YORK, Dec. 9, 1999 -- The costs and risks of reforming Social Security are obscured or understated in proposals from virtually all points on the political and economic spectrum, based on research by the 1999 winners of TIAA-CREF's fourth annual Paul A. Samuelson Award for Outstanding Scholarly Writing on Lifelong Financial Security. John Geanakoplos of Yale University, Olivia S. Mitchell of The Wharton School, and Stephen P. Zeldes of Columbia University, won the award for a submission first published in Prospects for Social Security Reform (University of Pennsylvania Press, 1999).

Some of the key findings in the award-winning "Social Security Money's Worth" are:

• Any reform must deal with accrued benefits promised to individuals for past contributions, and estimates of what these benefits are can differ by as much as $800 billion.

• Privatization has benefits, but proposals to privatize Social Security do not properly account for the immense costs of transition, the impact of transaction costs, and the risks involved.

• The benefits of investing in the stock market have been exaggerated. Contrary to an earlier official study, the present-value gain of investing a dollar of Social Security funds in equities instead of bonds would be 59 cents, not $2.85, when properly adjusted for risk factors.

The award-winning entry critiques several measures frequently used to compare Social Security outcomes under different reform scenarios. Money's-worth concepts such as the net present value of the unfunded Social Security liability, the internal rate of return on Social Security contributions, and the benefit-to-tax ratio, are widely used to describe the relationship between individual lifetime Social Security taxes paid and lifetime benefits received.

The authors' suggest that a realistic evaluation must reflect household well being, and show that in general no single number suffices. Under special conditions, the present discounted value of lifetime benefits, less lifetime taxes is an appropriate measure, both for ranking alternative reforms and for explaining why the current system is in financial crisis. Even under these conditions, other often-used measures like internal rates of return and the ratio of present value of benefits to contributions sometimes misrepresent well being.

The researchers also assert that money's worth estimates are biased in favor of Social Security privatization, because the gauges do not fully weigh the impact of transaction costs and the risks, both aggregate and individual. The authors believe that, even without accounting for risk, privatization, without raising revenues to cover the costs of transition, will not increase money's worth, net of the new taxes needed to cover the accrued benefits of past contributors.

The Paul Samuelson award is administered by the TIAA-CREF Institute, an educational and research arm of TIAA-CREF. The Institute's fields of research and education include pensions; retirement and savings behavior and policy; corporate governance; investment products and strategy; saving for higher education; health, life and long-term care insurance issues; and regulatory and legislative initiatives. The award was named after Nobel Prize winner Paul Samuelson in honor of his achievements in the field of economics, as well as for his service as a CREF trustee from 1974-85. The award carries a $20,000 cash prize.

The Award will be presented by John H. Biggs, TIAA-CREF chairman, president and CEO, at a January 7 reception to be held at the Allied Social Science Association's annual meeting at the Marriott Copley Place Hotel in Boston.

Receiving a Certificate of Excellence from the judges for a submission entitled By Force of Habit: A Consumption-Based Explanation of Aggregate Stock Market Behavior, will be John Y. Campbell of Harvard University and John H. Cochrane of the University of Chicago. Each author will receive $1,000.

Six noted scholars served as judges for the 1999 awards. They are: Willard T. Carleton, Karl L. Eller Professor of Finance, College of Business and Public Administration, University of Arizona; Robert L. Clark, Professor, Department of Economic and Department of Business Management, North Carolina State University; Alicia H. Munnell, Peter F. Drucker Professor of Management Sciences, Carroll School of Management, Boston College; Uwe E. Reinhardt, James Madison Professor of Political Economy and Professor of Economics and Public Affairs, Woodrow Wilson School, Princeton University; Robert J. Shiller, Stanley B. Resor Professor of Economics, Cowles Foundation for Research in Economics, Department of Economics, Yale University; and James P. Smith, Senior Economist, RAND Corporation.

TIAA-CREF is the largest pension system in the world and the premier one for people employed in education and research in the U.S. It serves approximately 9,000 institutions and more than two million of their employees. The non-profit organization also serves both educators and the general public with high-quality, low-cost mutual funds, annuities, IRAs, insurance and trust services, and manages several state-sponsored college savings programs.

EDITOR'S NOTE: For further information, including interviews with the award winners, please contact Patrick Connor, Media Relations Officer, 212-916-5769; E-mail: pconnor@tiaa-cref.org.

SOURCE TIAA-CREF