The 6.2 Percent Solution: A Plan for Reforming Social Security

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For the past several years there has been agrowing consensus about the need to reformSocial Security. Now, however, the debate hasadvanced to the point where it becomes importantto move beyond generalities and provide specificproposals for transforming Social Security to asystem of individual accounts. The Cato Projecton Social Security Choice, therefore, has developeda proposal to give workers ownership of andcontrol over their retirement funds.

Under this proposal:

  • Individuals would be allowed to divert theirhalf (6.2 percentage points) of the payrolltax to individually owned, privately investedaccounts. Those who chose to do sowould agree to forgo all future accrual ofretirement benefits under the traditionalSocial Security system.
  • The remaining 6.2 percentage points ofpayroll taxes would be used to pay transitioncosts and to fund disability and survivors’benefits.
  • Workers who chose the individual accountoption would receive a “recognition bond” based on the accrued value of their lifetime‐​to‐​date benefits. Those bonds, redeemable atthe worker’s retirement, would be fully tradablein secondary markets.
  • Those who wished to remain in the traditionalSocial Security system would be freeto do so, accepting a level of benefitspayable with the current level of revenue.

We expect this plan to restore Social Securityto long‐​term and sustainable solvency and to doso at a cost that is less than the cost of simplypropping up the existing program. And it woulddo far more than that.

Younger workers who chose the individualaccount option would receive benefits substantiallyhigher than those that could be paid undertraditional Social Security. At the same time,the plan would treat women and minoritiesmore fairly and allow low‐​income workers toaccumulate real wealth.

Most important, this proposal would reduceAmericans’ reliance on government and giveindividuals greater ownership of wealth, as wellas responsibility for and control over their ownlives. It would be a profound and significantincrease in individual liberty.

Download the Social Security Choice Paper


Michael D. Tanner

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 (2004).