The President’s Commission to Strengthen Social Security suggests three plans
for reforming Social Security. These plans divert various amounts of the payroll tax to a
personal account if the worker chooses to participate in the account. In return, Social
Security benefits are offset using accounts with real returns ranging from 2% to 3.5%. In
addition, the second and third plans proposed by the Commission include features that are
designed to balance the finances of the system by reducing the rate of growth of benefits
relative to the levels prescribed under current law, to make the system more
redistributive, and to make other changes.
When “personal accounts ” are mentioned, most people think of accounts that are
in some sense separate and shielded from the uncertainties of the Social Security system.
That is not the case for the personal accounts proposed by the Commission. Because the
participating individual is not entitled to the principal in the account, participating in the
account does not shield the individual from the political risks of being in the Social
Security system. As a result, the reduction in political risk fostered by the Commission’s
proposals comes mainly from the improvement in the financial status of the system
fostered by other provisions of the recommended plans.
Measures to improve the benefits of low-income individuals, widows and
widowers and to enhance the rewards to retirement all create incentive effects that are
also discussed in the paper.