Proposals for Private Accounts

Various proposals call for prefunding Social Security by shifting a portion of Social Security taxes into individually held accounts. The debate about private accounts in Social Security is separate from the issue of how to close Social Security's financing gap. Individual accounts, by themselves, make no independent contribution to the long-term solvency of Social Security. In fact, shifting Social Security taxes out of the traditional system to fund personal accounts hastens the day when funds will be insufficient to pay scheduled benefits. All scheduled Social Security taxes are needed to pay benefits for current and future beneficiaries.

Plans to shift Social Security taxes to individual accounts change the form of Social Security. Creating individual accounts would change Social Security from a social insurance system, which pools risks broadly and defines benefits in law, to a system of personal accounts in which people get out what they put in, plus investment gains, and minus investment losses and administrative expenses. Individual accounts are based on a property, or ownership concept, while the traditional system is based on insurance concepts and risk pooling.

Supporters of traditional Social Security point to its long record of success in providing basic income security for older Americans, disabled workers and their families, and families of deceased workers. They say that the current form of Social Security works well and is essential to ensure a secure safety net for workers and their families. Private accounts introduce risks that should not be a part of the basic foundation of income security. Rather, they argue that private retirement savings are an important supplement to Social Security, but are poor substitute for any part of it. Proponents of traditional Social Security believe that its finances can be balanced through incremental changes.

Proponents of individual accounts favor adding choice and personal responsibility to Social Security. They believe that Social Security should be changed to allow workers to keep part of their Social Security taxes and invest the money as they choose. Some proponents of individual accounts want to prefund Social Security and believe that individual accounts are the best way to achieve prefunding because individuals, not the government, would hold the money. A 1996 Advisory Council on Social Security debated competing plans for individual accounts versus traditional methods to restore solvency. A commission appointed by President Bush in 2001 designed voluntary plans to let workers keep part of their Social Security taxes and invest the money in individual accounts.

For more information, see:

• Uncharted Waters: Paying Benefits from Individual Accounts in Federal Retirement Policy, Study Panel Report
• Social Security and Private Savings: Complementary Roles, Social Security Brief No. 29 
• Building on Social Security's Success, A Briefing Paper
• Why Social Insurance? Social Security Brief No. 6
• Values Matter in the Social Security Debate, June 17, 2005 Policy Seminar
• NASI Member Social Security Sounding Board
• What Stock Market Returns Are Reasonable to Expect for Social Security Accounts or Investments Over the Long Term? May 13, 2005 Policy Seminar
• Options to Balance Social Security Funds Over the Next 75 Years, Social Security Brief No. 18
• Evaluating Issues in Privatizing Social Security; Report of the Panel on Privatization of Social Security
• The Predictability of Retirement Income, Social Security Brief No. 3
• Sooner is Better in Social Security Reform, Social Security Brief No. 2
• Political Risk and Social Security Reform, Social Security Brief No. 1
• Experts Agree on Economics, Differ on Values and Politics of Privatizing Social Security (Social Insurance Update, 12/99)
• Advisory Council on Social Security, 1996: Solvency and Private Account Plans (Social Insurance Update, 12/96)

Read what some NASI members think:*

• Henry Aaron: "Another Lession from Today's Financial Meltdown" (11/6/200)
• Walter Shur: "A Slow Death" (8/7/05)
• Carson E. Beadle: "Balancing Risk and Guarantees" (2/3/05)
• Carmelo Mesa-Lago: "The Chilean Prescription Will Worsen US Social Security Ills" (1/11/05)
• William J. Arnone: "Language and Labels" (1/11/05)

* The views of NASI members are their own and not an official position of the National Academy of Social Insurance or its funders.