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| SSP No. 32 |
February 17, 2004 |
The 6.2 Percent Solution: A Plan for Reforming Social Security
by Michael Tanner
Michael Tanner is director of the Cato Institute's Project on Social Security Choice and editor of Social
Security and Its Discontents: Perspectives on Choice (forthcoming).
Executive Summary
For the past several years there has been a
growing consensus about the need to reform
Social Security. Now, however, the debate has
advanced to the point where it becomes important
to move beyond generalities and provide specific
proposals for transforming Social Security to a
system of individual accounts. The Cato Project
on Social Security Choice, therefore, has developed
a proposal to give workers ownership of and
control over their retirement funds.
Under this proposal:
- Individuals would be allowed to divert their
half (6.2 percentage points) of the payroll
tax to individually owned, privately invested
accounts. Those who chose to do so
would agree to forgo all future accrual of
retirement benefits under the traditional
Social Security system.
- The remaining 6.2 percentage points of
payroll taxes would be used to pay transition
costs and to fund disability and survivors'
benefits.
- Workers who chose the individual account
option would receive a "recognition bond" based on the accrued value of their lifetimeto-
date benefits. Those bonds, redeemable at
the worker's retirement, would be fully tradable
in secondary markets.
- Those who wished to remain in the traditional
Social Security system would be free
to do so, accepting a level of benefits
payable with the current level of revenue.
We expect this plan to restore Social Security
to long-term and sustainable solvency and to do
so at a cost that is less than the cost of simply
propping up the existing program. And it would
do far more than that.
Younger workers who chose the individual
account option would receive benefits substantially
higher than those that could be paid under
traditional Social Security. At the same time,
the plan would treat women and minorities
more fairly and allow low-income workers to
accumulate real wealth.
Most important, this proposal would reduce
Americans' reliance on government and give
individuals greater ownership of wealth, as well
as responsibility for and control over their own
lives. It would be a profound and significant
increase in individual liberty.
Index of Social Security Choice Papers
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