Large Accounts and Small Cash Deficits: Increasing Personal Account Size within a Fiscally Responsible Social Security Reform Framework

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As the debate over Social Security reformintensifies, it becomes more important tomove beyond generalities to provide specificproposals for how to transform Social Securityto a system including personal retirementaccounts. Without endorsing any specific proposal,the Cato Project on Social SecurityChoice will present a number of possible scenariosfor the creation of personal retirementaccounts.

The spectrum of individuals and groups whosupport Social Security reform based on voluntarypersonal retirement accounts is wide. Yetdifferent parts of the Social Security reformspectrum place priorities on different aspects ofreform proposals, and many existing reformplans do not satisfy the entire reform coalition.The Social Security reform spectrum can bebroadly divided into two groups:

Philosophical supporters of voluntary personalaccounts wish to increase individuals' ownershipand control of and the inheritability of their SocialSecurity contributions and therefore favor largeaccounts investing a substantial portion of eachworker's 12.4 percent payroll tax.

Fiscal-responsibility supporters of personalaccounts wish to reduce the pressure that SocialSecurity places on the federal budget as thepopulation ages and support personal accountsas a way to prefund future benefit obligations.However, the desire to reduce or avoid largecash deficits in the program today leads fiscal-responsibilitysupporters of reform to generallyfavor smaller personal accounts investing only2-3 percentage points of the payroll tax.

What follows is the outline of a proposal toincorporate large personal accounts within a structurethat meets the concerns of fiscal-responsibilitysupporters of reform. It is less a compromise orsplitting of the difference than a recognition thatdifferent parts of the reform spectrum favor personalaccounts for different reasons and that it ispossible to structure a proposal in a way that satisfiesboth groups' priorities.

In addition, the proposal includes a way totreat individuals who choose not to hold personalaccounts so that they can receive the fullbenefits promised by the current program. Thistreatment of non-account holders is fair and fiscallyresponsible and presents workers with anhonest choice between the two ways of providingSocial Security benefits.

Download the Social Security Choice Paper


Andrew G. Biggs

Andrew G. Biggs was formerly assistant director of the Cato Institute's Project on Social Security Choice.