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February 17, 2004

SSP No. 32

The 6.2 Percent Solution

A Plan for Reforming Social Security

by Michael Tanner

based on the accrued value of their lifetime-

Executive Summary

to-date benefits. Those bonds, redeemable at

the worker's retirement, would be fully trad-

For the past several years there has been a

able in secondary markets.

growing consensus about the need to reform

· Those who wished to remain in the tradi-

Social Security. Now, however, the debate has

advanced to the point where it becomes important

tional Social Security system would be free

to move beyond generalities and provide specific

to do so, accepting a level of benefits

proposals for transforming Social Security to a

payable with the current level of revenue.

system of individual accounts. The Cato Project

on Social Security Choice, therefore, has devel-

We expect this plan to restore Social Security

oped a proposal to give workers ownership of and

to long-term and sustainable solvency and to do

control over their retirement funds.

so at a cost that is less than the cost of simply

Under this proposal:

propping up the existing program. And it would

do far more than that.

· Individuals would be allowed to divert their

Younger workers who chose the individual

account option would receive benefits substan-

half (6.2 percentage points) of the payroll

tially higher than those that could be paid under

tax to individually owned, privately invest-

traditional Social Security. At the same time,

ed accounts. Those who chose to do so

the plan would treat women and minorities

would agree to forgo all future accrual of

more fairly and allow low-income workers to

retirement benefits under the traditional

accumulate real wealth.

Social Security system.

· The remaining 6.2 percentage points of

Most important, this proposal would reduce

Americans' reliance on government and give

payroll taxes would be used to pay transi-

individuals greater ownership of wealth, as well

tion costs and to fund disability and sur-

as responsibility for and control over their own

vivors' benefits.

· Workers who chose the individual account

lives. It would be a profound and significant

increase in individual liberty.

option would receive a "recognition bond"

Michael Tanner is director of the Cato Institute's Project on Social Security Choice and editor of Social

Security and Its Discontents: Perspectives on Choice (forthcoming).