Social Security Reform: Individual Account Proposals

Publication Date: July 2002

Publisher: Library of Congress. Congressional Research Service

Author(s):

Research Area: Banking and finance

Type:

Abstract:

Many proposals have been advanced to reform Social Security. Some would establish “Social Security individual accounts” (SSIAs) to accumulate contributions for workers, invest their funds, and provide them with retirement income. Key features of 18 SSIA proposals are compared in this report. The proposals vary in regard to: the basic purpose of the accounts; whether participation is mandatory or voluntary; the source and level of contributions; how account assets are managed; what investment choices are available; whether or not a minimum benefit is promised; and how the federal income tax applies.

Fourteen of the 18 SSIA proposals would use the new accounts to replace a part (in one case all) of Social Security benefits (“carveout” plans). The other four proposals would use SSIAs as a means for workers to supplement Social Security (“add-on” plans). Five of the 14 carveout plans would mandate participation; the other nine propose voluntary carveouts. Two of the four add-on plans would mandate participation. However, three of the seven mandatory plans would limit the mandate to workers under a certain age.

Proposed contributions to SSIAs range from 1% of wages subject to the Social Security payroll tax up to the full 12.4% employee/employer payroll tax. The carveout plans would divert some part (in one case all) of Social Security taxes for contribution to SSIAs. However, eight of the 18 proposals would draw on general federal revenue for some or all of the contributions.

Ten of the 18 SSIA proposals would limit investment options for account assets to a few funds approved expressly for that purpose by a board of trustees. The eight exceptions would allow individuals to invest their SSIA assets with a broader range of existing financial institutions.

Five of the 14 carveout proposals would guarantee participants some minimum SSIA benefit to protect against adverse investment outcomes, the guarantees being based in most cases on an individual’s Social Security benefit entitlement. Of the nine carveout proposals offering no guarantee, five do not mandate participation. Two add-on proposals include a benefit floor.

Treatment of SSIAs under the federal income tax would vary, with five of the 18 proposals essentially following current tax policy for private retirement plans. At the other extreme, one plan would make SSIA contributions, investment earnings, and distributions completely tax-exempt.

This report will be updated as legislative action occurs.