The Structure of Social Security Individual Account Contributions and Investments: Choices and Implications

Publication Date: May 2006

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

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Abstract:

Policymakers have debated creating a system of individual accounts (IAs) as part of Social Security for many years. President Bush included a call for individual accounts in his 2005 State of the Union address, and several members of Congress have introduced bills in the 109th Congress that include IAs. However, throughout this debate, very little attention has been paid to the practical issues of program design and implementation -- issues that could have a significant impact on the cost of the program, the level of participation by workers, the fees levied on accounts, and, ultimately, the assets available at retirement.

This report describes policymakers' administrative and structural choices regarding the collection and investment of assets in a system of individual accounts. The choices are many. It would need to be determined who would be eligible to participate in IAs, how individuals would enroll, how participants would make their contributions, and how much would be collected from them. Workers would need to be educated about enrollment in the new program, the investment choices they face, and the implications for their final benefits. It must also be established how records would be kept, what services would be provided to account holders, and how errors would be corrected. Other choices surround how assets would be invested and whether there would be any restrictions on fees. In each of these areas, this report briefly summarizes the options available within a system of IAs, the potential implications of particular policy choices and, when appropriate, current Social Security and pension policy.

The consequences of inadequate system design have become clear in other countries that have adopted IAs. In Australia, a public campaign had to be designed to locate the owners of 3 million lost accounts. In Great Britain, unscrupulous financial advisers persuaded thousands of investors to leave state pension funds, to their disadvantage, in a widely reported "mis-selling" scandal. To provide insights, this report also gives examples of problems that other countries have faced when implementing IAs.

A system of IAs could involve millions of Americans, billions of dollars, and could have a broad impact on the American economy. If workers contributed 2% of their current taxable earnings, the accounts could grow to as much as 10% of GDP in 10 years and to 25% of GDP in 20 years. A contribution rate of 5% could accumulate more equities in IAs in 11 years than are currently held by all mutual funds combined. Thus, the stakes are high and there is a compelling need for thorough planning and administration.

This report will not be updated.