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Provisions Affecting Individual Accounts
The current Social Security program is a defined benefit social insurance program. A worker and eligible dependents receive monthly benefits based on a formula that takes into account the worker's earnings history. Financing of the program is pay-as-you-go. The payroll contributions of workers each month help provide these benefits to eligible retirees, disabled workers, and survivors in the same month. In contrast, individual accounts provide benefits to each beneficiary using: (1) their own worker contributions; (2) the contributions to their account from their employer; and (3) investment earnings on these contributions. Thus, individual accounts are completely funded in advance.
The potential sources of the contributions to individual accounts are: (1) a redirection of some portion of Social Security payroll tax; (2) transfers from the General Fund of the Treasury; (3) additional contributions from workers (and/or the employers); or (4) some combination of the above. In addition, individual accounts can be mandatory or voluntary.
Many of the individual account provisions included in solvency proposals would redirect some portion of each participating worker's Social Security payroll tax to an individual account and later pay a reduced traditional monthly Social Security benefit. Some plans base the amount of reduction, or "benefit offset", on a hypothetical or shadow account balance accumulated to retirement (or to entitlement to disability benefits in some proposals). The rate of return at which hypothetical accounts accumulate is generally set at a level such that workers should have a good chance of doing better with their actual investments over a working lifetime. These "benefit offsets" are a source of savings to the Social Security trust funds. Individual account provisions of this type generally do not, in themselves, improve the solvency of the Social Security trust funds. As a result, some proposals often include some additional revenues (like General Fund transfers) for a period of years while the benefit offset provision is maturing.
The effect of individual accounts on long-range financing of the Social Security benefit varies considerably depending on: (1) the size of the individual accounts (i.e., the percentage of taxable earnings invested in individual accounts); (2) the source of the contribution to the accounts; and (3) the specifications of any "benefit offset" provision. Several comprehensive solvency proposals provide examples of proposals that include individual accounts.
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Last reviewed or modified January 03, 2012