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We expect this

substantially greater than those that are current-

Introduction

proposal to

ly payable under traditional Social Security.

restore Social

They would own and control those assets. At

For the past several years there has been a

the same time, women and minorities would be

growing consensus about the need to reform

Security to

treated fairly, and low-income workers could

Social Security. As the debate has developed,

long-term and

accumulate real wealth.

the Cato Institute has provided studies and

sustainable

Most important, this proposal would reduce

other information on the problems facing

Americans' reliance on government and give

Social Security and the advantages of individ-

solvency and

individuals greater responsibility for and con-

ual accounts as a way to reform the system. But

to do so at a

trol over their own lives. It would provide a

until now we have not suggested a specific plan

cost less than

profound and significant increase in individual

for reform.

liberty.

Now, however, the debate has advanced to

the cost of

the point where it becomes important to move

simply

beyond generalities and provide specific pro-

continuing the

posals for transforming Social Security to a

The Social Security Crisis

system of individual accounts. The Cato Project

existing

on Social Security Choice, therefore, has devel-

Social Security as we know it is facing irre-

program.

oped a proposal to give workers ownership of

sistible demographic and fiscal pressures that

and control over their retirement funds.

threaten the future retirement benefits of today's

This plan would establish voluntary person-

young workers. Although Social Security is cur-

al accounts for workers born on or after January

rently running a surplus, according to the sys-

1, 1950. Workers would have the option of (a)

tem's own trustees, that surplus will turn into a

deficit within the next 15 years.1 That is, by 2018

depositing their half of the current payroll tax

(6.2 percentage points) in an individual account

Social Security will be paying out more in bene-

and forgoing future accrual of Social Security

fits than it takes in through taxes (Figure 1).

retirement benefits or (b) remaining in the tra-

In theory, Social Security is supposed to con-

ditional Social Security system and receiving

tinue paying benefits after 2018 by drawing on

the level of retirement benefits payable on a

the Social Security Trust Fund. The trust fund is

sustainable basis given current revenue and

supposed to provide sufficient funds to contin-

expenditure projections.

ue paying full benefits until 2042, after which it

Workers choosing the individual account

will be exhausted. At that point, by law, Social

option would have a variety of investment

Security benefits will have to be cut by approx-

imately 27 percent.2

options, with the number of options increasing as

the size of their accounts increased. The initial

However, in reality, the Social Security Trust

default option would be a balanced fund, weight-

Fund is not an asset that can be used to pay ben-

ed 60 percent stocks and 40 percent bonds.

efits. Any Social Security surpluses accumulat-

Workers choosing the individual account option

ed to date have been spent, leaving a trust fund

would also receive bonds recognizing their past

that consists only of government bonds (IOUs)

contributions to Social Security.

that will eventually have to be repaid by tax-

At retirement, workers would be able to

payers. As the Clinton administration's fiscal

choose an annuity, a programmed withdrawal

year 2000 budget explained it:

option, or the combination of an annuity and a

lump-sum payment. The government would

These [Trust Fund] balances are available

maintain a safety net to insure that no senior

to finance future benefit payments and

would retire with income less than 120 percent

other Trust Fund expenditures--but only

of the poverty level.

in a bookkeeping sense. . . . They do not

We expect this proposal to restore Social

consist of real economic assets that can be

Security to long-term and sustainable solvency

drawn down in the future to fund benefits.

and to do so at a cost less than the cost of sim-

Instead, they are claims on the Treasury

ply continuing the existing program. And it

that, when redeemed, will have to be

would do far more than that.

financed by raising taxes, borrowing from

Workers who chose the individual account

the public, or reducing benefits or other

option could accumulate retirement resources

expenditures. The existence of large Trust

2