Cato’s Social Security Plan
- Individuals would be able to privately invest 6.2 percentage points of their payroll tax through individual accounts. Those who choose to do so will forfeit all future accrual of Social Security benefits.
- Individuals who choose individual accounts will receive a recognition bond based on past contributions to Social Security. These zero-coupon bonds will be offered to all workers who have contributed to Social Security, regardless of how long they have been in the system, but will be offered on a discounted basis.
- Allowable investment options for the individual accounts will be based on a three-tier system: a centralized, pooled collection and holding point; a limited series of investment options with a lifecycle fund as a default mechanism; and a wider range of investment options for individuals who accumulate a minimum level in their accounts.
- At retirement, individuals will be given an option of purchasing a family annuity or taking a programmed withdrawal. Those two options will be mandated only to a level required to provide an income above a minimum level. Funds in excess of the amount required to achieve this level of retirement income can be withdrawn in a lump sum.
- If individuals accumulate sufficient funds within their accounts to allow them to purchase an annuity that will keep them above a minimum income level in retirement, they will be able to opt out of the Social Security system entirely.
- The remaining 6.2 percentage points of payroll taxes will be used to pay transition costs and to fund disability and survivors benefits. Once, far in the future, transition costs are fully paid for, this portion of the payroll tax will be reduced to the level necessary to pay survivors and disability benefits.
- The plan should be considered in the context of payable Social Security benefits. That is, the Social Security system will be restored to a solvent pay-as-you-go basis before the development of individual accounts. Workers who choose to remain in the traditional Social Security system will receive whatever level of benefits Social Security can pay with existing levels. The best method for accomplishing this is to change the initial benefit formula from wage indexing to price indexing.
- The Social Security Administration has scored Cato’s plan as restoring Social Security to permanent sustainable balance.