Social Security’s long-term solvency challenges have 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 proposals to diversify the Social Security trust funds’ investments, these proposals would reduce and replace Social Security’s guaranteed benefit with a nonguaranteed savings plan.
Proposals to “carve out” private accounts from Social Security threaten the program’s income-insurance and family-protection features. They 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 part of Social Security with individual accounts is problematic on a number of fronts:
- Individual accounts erode the progressive nature of Social Security. Social Security 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 could be lowered by 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 between 0.5 percent and 1 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.
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, and government borrowing would be necessary to pay current beneficiaries.
SOCIAL SECURITY INDIVIDUAL ACCOUNTS: Policy
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). Policymakers should create incentives to encourage people to save for retirement 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.
Neither current nor future Social Security revenues should be used to fund the creation of private accounts.
The costs of some proposed changes to Social Security, such as those that would finance private accounts with general revenue transfers, could affect the non-Social Security budget. These costs must be recognized and accounted for in a clear and transparent way.