Partial Privatization of Social Security: A Simulation of Possible Outcomes and Risks to Workers (p. 311)
Full Text Article
Michael Tucker, Fairfield University

Social Security reform as put forward by the President's Commission on Strengthening Social Security (2001) includes three model proposals each of which contain voluntary privatized accounts. Opting for private savings incurs the penalty of losing benefits that accrue in a set-aside account. Three simulations were run using Monte Carlo simulation based on historical distributions of stock and bond returns. These simulations projected end-of-period savings under different market conditions for Model 2, the only model projecting elimination of Social Security deficits. In all cases the average privatized account accumulations were greater than the set-aside benchmark account; however, the probability of falling below the set-aside account's lost benefits range from a low of 13% to a high of 30%. The considerable probability of failing to exceed a lost-benefits account will be an important consideration for workers in determining whether or not to exercise the option to participate.

Catastrophic Risk, Homeowner Response, and Wealth-Maximizing Wind Damage Mitigation (p. 327)
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Robert T. Burros, Ir., University of North Carolina at Wilmington
Christopher F. Dumas, University of North Carolina at Wilmington
I. Edward Graham, Jr., University of North Carolina at Wilmington

Many experts encourage homeowners to improve their houses to better survive natural catastrophes and reduce overall societal costs. However, we find that these encouragements are not necessarily financially sound for the homeowner at risk of hurricane wind damage. We find that subsidized insurance reduces the incentive for a risk-neutral homeowner to purchase structural mitigation, because mitigation does not generally reduce damages to below subsidized deductibles. If insurance premiums increase or if hurricane strike probabilities or market returns decrease, then the wealth-maximizing homeowner drops insurance and purchases mitigation. For homeowners to purchase both mitigation and insurance, high-deductible/low-premium insurance must be offered.

Withdrawal Patterns and Rebalancing Costs for Taxable Portfolios (p. 341)
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J. Christopher Hughen, Bowling Green State University
Francis E. Laatsch, Bowling Green State University
Daniel P. Klein, Bowling Green State University

This article quantifies the effect of taxes on the magnitude and variability of cash flows from taxable retirement portfolios. While previous research focuses on pretax cash flows, this paper includes taxes associated with rebalancing and withdrawals. We incorporate the differential tax treatment of interest income and capital gains. Taxes have dramatic effects on the size and variability of the after-tax cash flows withdrawn from the portfolio. Financial planners may use our results to determine the ideal equity allocation in taxable retirement portfolios. For withdrawals below 5% and above 8% of initial portfolio value, our results suggest that the 100% equity allocation generally provides the most attractive trade-off between risk and return during the retirement period. Even for withdrawals (as a percentage of initial portfolio value) from 5% to 8%, the 100% equity allocation is an attractive choice because it has substantially higher mean terminal value and similarly higher mean after-tax cash flows. An analysis of inflation-adjusted withdrawal amounts also strongly favors the 100% equity allocation.

An Investigation of Adjustable-rate Mortgage Pricing Features (p. 367)
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William K. Templeton, Butler University
Robert S. Main, Butler University
J. B. Orris, Butler University

Mortgage borrowers face the difficult prospect of evaluating the costs and risks associated with the choice of terms for adjustable-rate mortgages. This study uses a simulation approach to model the choices. We represent the risk of the adjustable-rate mortages with distributions of present value-cost differentials for a variety of mortgage life periods. We provide insight on the financial planning aspect by modeling the impact of mortgage-rate changes on the size of payments for adjustable-rate mortgages. Simulation can yield nonintuitive results that may lead to better decision making by borrowers.

What Factors Affect the Household Net Worth of Employees and Business Owners? (p. 381)
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Zhan (Sandy) Chen, Purdue University
Sharon A. DeVaney, Purdue University

Why do some households accumulate a prodigious amount of wealth while others have barely enough to meet their needs? This study investigates the effects of financial attitudes, financial behavior, employment, and socioeconomic factors on the household net worth of employees and business owners. Regression analysis using the 1998 Survey of Consumer Finances shows that household income has the largest impact on employees' net worth. The ownership of a large business and household income have the largest impact on business owners' net worth. Being frugal also influences business owner's net worth.