Replacing a Portion of Social Security Benefits with Individual Accounts


Social Security’s long-term solvency has been used by some to propose basic structural changes that would replace all or part of Social Security’s guaranteed benefit promise with individual accounts. Under these proposals a portion of the payroll taxes that currently fund Social Security would be diverted into individual accounts and invested in stocks and bonds. Unlike the prior proposal to diversify the Social Security trust funds investments, this proposal would reduce and replace Social Security’s guaranteed benefit with a nonguaranteed savings plan. These proposals to “carve out” private accounts from Social Security threaten the program’s income-insurance and family-protection features.

Such proposals would also worsen the program’s solvency. Because payroll taxes would be diverted into private accounts, these tax revenues would no longer be available to pay current retirees. The trust funds would be depleted much sooner. Alternatively, the private accounts could be financed through government borrowing, which would increase both the federal debt and deficit.

Replacing part of Social Security with individual accounts is problematic on a number of fronts:

  • Individual accounts erode the progressive nature of Social Security, which is structured to provide a higher return to lower earners than to higher earners. In contrast, accumulations in individual accounts—and the resulting income in retirement—would be directly proportional to earnings.
  • Individual accounts expose workers to risks in the financial markets. These risks include making poor investment choices, needing to retire at a time when the market is down, and deciding how to manage funds to make them last throughout retirement. The people who are most dependent on Social Security income in retirement are often less able to manage investments and tolerate market risks.
  • Returns on these accounts would be lowered by potentially substantial administrative costs. If the private sector managed individual private accounts, the administrative costs would be comparable to those for an equity mutual fund, which average about 1.5 percent of account balances annually.
  • Individual accounts could jeopardize Social Security’s disability protections. Young workers who become disabled could receive a smaller lifetime benefit because they would not have had enough time to build up their individual account and might not be able to contribute once they withdraw from the labor force.
  • The current system’s spouse and survivor benefits would be at risk in a system with private accounts. Many individual accounts would be too small to provide meaningful benefits to surviving spouses and children, particularly if the worker dies at an early age.

These flaws would particularly disadvantage low-wage earners (predominantly women and people from racial and ethnic groups that have experienced discrimination), for whom Social Security benefits represent a larger portion of preretirement earnings than they do for average and high-wage earners.

Replacing a Portion of Social Security Benefits with Individual Accounts: Policy

Individual accounts

In this policy: Federal

Social Security’s basic floor of income security for future generations should not be replaced by the hypothetical and uncertain gains assumed to come from individual private accounts (or privatization). Measures to increase individuals’ saving for retirement are to be encouraged but should be in addition to, not instead of, Social Security’s guaranteed benefits.

Social Security’s guaranteed, lifelong, inflation-protected Old Age, Survivors, and Disability Insurance benefits should not be replaced by individual accounts financed with payroll tax dollars needed to fund current and future benefits.

AARP opposes the use of current or future Social Security revenues to fund the creation of private accounts.