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 foundation 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.
How Would Money Be Paid Out of Individual Accounts?
Discussions of private accounts in Social Security have focused on how money would build up in the accounts. Yet questions about how money would be paid out of the accounts have been largely neglected. A 2005 Academy report, Uncharted Waters: Paying Benefits from Individual Accounts in Federal Retirement Policy, represents two and a half years of work by a non-partisan panel of 27 experts on retirement accounts and Social Security. It addresses such questions as:
How much access would retirees have to their account funds? Would they be allowed to take lump sums when they retire, or would they be required to buy annuities—insurance contracts that guarantee monthly payments for life?
If annuities were required, who would design, market and sell them? Who would regulate the providers? Who would guarantee the payments in the case of annuity provider failure?
Would people be allowed to withdraw funds or borrow against the personal accounts before retirement age, as they can now with 401(k) savings plans? Do the answers change if the worker becomes disabled or dies before retirement?
If workers shift part of their Social Security taxes to private accounts, how would the Social Security trust funds be compensated for the loss of revenue?
What rights would a spouse or former spouse have to the accounts? Would accounts be divisible property at divorce? Would spousal rights be decided in federal law or in family law that differs from state to state?
The questions are explored in depth in the Panel’s final report.