For the past several years there has been a growing consensus
about the need to reform Social Security. As the debate has devel-
oped, the Cato Institute has provided studies and other information
on the problems facing Social Security and the advantages of individ-
ual accounts as a way to reform the system. But until now we have
not suggested a specific plan for reform.

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.

This plan would establish voluntary personal accounts for workers
born on or after January 1, 1950. Workers would have the option of
(1) depositing their half of the current payroll tax (6.2 percentage
points) in an individual account and forgoing future accrual of Social
Security retirement benefits or (2) remaining in the traditional Social
Security system and receiving the level of retirement benefits payable
on a sustainable basis given current revenue and expenditure
projections.

Workers choosing the individual account option would have a
variety of investment options, with the number of options increasing
as the size of their accounts increased. The initial default option
would be a balanced fund, weighted 60 percent stocks and 40 percent
bonds. Workers choosing the individual account option would also
receive bonds recognizing their past contributions to Social Security.

At retirement, workers would be able to choose an annuity, a
programmed withdrawal option, or the combination of an annuity

Originally published as Cato Institute Social Security Paper no. 32, February 17, 2004.

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