Academic journal article Social Security Bulletin

Executive Summary: Evaluating Issues in Privatizing Social Security

Academic journal article Social Security Bulletin

Executive Summary: Evaluating Issues in Privatizing Social Security

Article excerpt

The National Academy of Social Insurance is pleased to issue the final report of its study panel on Evaluating Issues in Privatizing Social Security The panel's charge was to address the major technical issues raised by two generic types of Social Security reform proposals involving elements of privatization as part of restoring long-term fiscal balance to the program. One type of reform would retain the current defined-benefit structure of Social Security, but build and maintain a larger trust fund partially invested in private securities. The other would represent a marked departure from the current structure of Social Security by establishing individual defined-contribution accounts with investment choices that include private securities. (The panel was not asked to consider more traditional approaches to restoring fiscal balance to the program, since the analytic issues involved therein are already reasonably well understood.) Reform of Social Security has risen to the top of the national agenda since the Academy initiated this project in mid- 1996, with concerns about privatization playing a major role in the debate. Thus, the findings of this panel are particularly timely and salient.

Executive Summary

This study explores issues that arise under proposals (1) to build and maintain a sizable Social Security Trust Fund, partially invested in stocks and corporate bonds, and (2) to introduce individual defined-contribution accounts. The report analyzes the potential effects of such proposals and examines many of the related implementation issues.

The report is organized around five policy questions:

(1) Should we move toward more advance funding of Social Security obligations, or should these obligations continue to be financed on a pay-as-you-go basis with only a contingency reserve?

(2) Should the Social Security Trust Fund invest in a diversified portfolio that includes stocks and corporate bonds, or should it continue to invest only in Treasury bonds? Should Social Security individual accounts have access to diversified portfolios that include stocks and corporate bonds?

(3) Should the reformed system create individual (funded defined-contribution) accounts, or should it remain a single collective fund with a defined-benefit formula?

(4) If individual accounts are adopted, how much choice should workers be allowed in selecting investments, and in the timing and form of payments from the accounts? Should individual accounts be voluntary or mandatory?

(5) If individual accounts are adopted, should the reformed system move toward private and decentralized collection of contributions, management of investments, and payment of annuities, or should these functions be administered by a government agency (the Treasury or the Social Security Administration)?

Following are the Panel's analyses, findings, and summary views on these five questions. A recommendation by the Panel is not necessarily unanimous, but has the support of at least three-fourths of the members of the Panel; some qualifications and opposing viewpoints are presented in the text or in the notes. Some technical terms are defined in the Glossary [of the full report].

The term "privatization" is used in a variety of ways in current Social Security discussions. We distinguish between three terms: advance funding, portfolio diversification, and individual accounts:

(1) By increased advance funding we mean building and maintaining greater total balances for Social Security, whether this is done in individual accounts or in the Social Security Trust Fund.

(2) By portfolio diversification we mean investing funds (either from individual accounts or from the Trust Fund) into a broad range of assets, including stocks and corporate bonds.

(3) By individual accounts, we mean replacing all or part of the current defined-benefit system with a definedcontribution system of individual accounts held in individual workers' names. …

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