Social Security Reform: The Issue of Individual Versus Collective Investment for Retirement

Publication Date: June 2000

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

Of the many issues raised in the current Social Security debate, perhaps none is more complex than whether and how the nation's financial markets might be used to reform the system. In its simplest form, the question of how it might be done has brought attention to two possible approaches: (1) having individuals invest some or all of their Social Security contributions directly in the markets or (2) having a government appointed entity invest some of them in the markets for the Social Security trust funds. The current system is a collective one; its resources are shared in the sense that it does not set aside a person's Social Security taxes for his or her own use. Social Security benefits are based instead on a person's "average" earnings and most of a person's taxes are used to pay the benefits of today's recipients. Any surplus is recorded to the trust funds for the potential future benefit of all recipients.

Proponents of a more individualized system of personal accounts say that taking people's money and using it to pay for someone else's benefits is unfair. They argue that it would be better if people invested some or all of their own money for their own retirement. In this way, they contend, people would feel they had gotten what they paid for based on their own decisions. If they want to take more risks, they should be able to. If they want to be more cautious, they could do that too. Simply stated, individual account proponents argue that people should have more choices. Proponents of the current system say that it protects society, as much as the individual, against poverty. They argue that in the absence of Social Security, widespread destitution would exist among the aged and disabled. They do not dispute the claim that people should be able to choose how to save and invest, but through their personal savings and private pensions, not through Social Security.

Elements of both camps say that investing in the financial markets can help make the nation's retirement system more secure. Proponents of the current system who do so (recognizing that not all do) contend that the higher yield from investing a portion of the trust funds in the markets could help reduce the system's long-term funding problem. Proponents of personal accounts generally distrust the government to invest without interfering with private enterprise and would prefer that people grow their own accounts to supplement Social Security, perhaps allowing future Social Security benefits to be constrained enough to make the system solvent. While shoring up the system is the catalyst for discussion, much of the debate emanates from a philosophical conflict about how much the government needs to be involved in securing retirements. Proponents of the current system argue that to adopt a more individualized system, where how well one invests becomes critical to one's retirement well being, would be too big a risk for many of society's economically vulnerable people. They see the current program as a necessary role for government in assuring a minimal standard of retirement income. Others contend that society has changed and is much more capable today than in the 1930s of sustaining a system that does not rely on a mandated transfer of income from workers to recipients. They argue that given adequate incentives, perhaps even a mandate, people could effectively save the same Social Security tax dollars on their own, possibly achieving greater economic returns than afforded by a politically-driven, governmental system.