Chart 1: The Role of Private Accounts in Offsetting Benefit Reductions

Chart 1: The Role of Private Accounts in Offsetting Benefit Reductions

Defined Benefits  ↓		Notional Account  ↓	←	Diverted payroll contributions are double-counted in parallel accounts (during working years)	→		Private Account ↓
Calculated using inflation-indexing to determine the "bend points"   ↓		Accumulates interest at the rate of return on Treasury bonds  ↓					↓ Accumulates interest at the nominal portfolio rate of return less annual fees  ↓
↓		↓				↙︎	↓	↘︎
↓		↓ At Retirement:  Annuitized at no cost to provide a constant real monthly benefit  　↓				↓  At Retirement:  Partially annuitized to cover the shortfall in the defined benefit after "clawback" (if any)  ↓	↓ At Retirement:  Fully annuitized if the account is too small to provide poverty-level of benefits	↓ Upon Death:  Passed on to heirs if the defined benefit after "clawback" is sufficient to provide poverty-level benefits or the worker dies before retiring
↓ Defined benefit les amount	less	↓ Constant real monthly benefit  equals	equals	Benefit after "clawback"	plus	↓ Annuitized portion of the private account  ↓	equals	Monthly benefits at poverty level
This would be the guaranteed benefit to those who do not establish a a personal account    ①				Actual payment from government received by those who choose personal accounts		↓ Any portion not annuitized can be passed on to heirs