For the past several years there has been a growing consensus about the need to reform Social Security. Now, however, the debate has advanced to the point where it becomes important to move beyond generalities and provide specific proposals for transforming Social Security to a system of individual accounts. The Cato Project on Social Security Choice, therefore, has developed a proposal to give workers ownership of and control over their retirement funds.Under this proposal:
- Individuals would be allowed to divert their half (6.2 percentage points) of the payroll tax to individually owned, privately invested accounts. Those who chose to do so would agree to forgo all future accrual of retirement benefits under the traditional Social Security system.
- The remaining 6.2 percentage points of payroll taxes would be used to pay transition costs and to fund disability and survivors’ benefits.
- Workers who chose the individual account option would receive a “recognition bond” based on the accrued value of their lifetime-to-date benefits. Those bonds, redeemable at the worker’s retirement, would be fully tradable in secondary markets.
- Those who wished to remain in the traditional Social Security system would be free to do so, accepting a level of benefits payable with the current level of revenue.
We expect this plan to restore Social Security to long-term and sustainable solvency and to do so at a cost that is less than the cost of simply propping up the existing program. And it would do far more than that.
Younger workers who chose the individual account option would receive benefits substantially higher than those that could be paid under traditional Social Security. At the same time, the plan would treat women and minorities more fairly and allow low-income workers to accumulate real wealth.
Most important, this proposal would reduce Americans’ reliance on government and give individuals greater ownership of wealth, as well as responsibility for and control over their own lives. It would be a profound and significant increase in individual liberty.