The 6.2 Percent Solution: A Plan for
Reforming Social Security
For the past several years there has been a growing consensus about the need to reform Social Security. As the debate has developed, the Cato Institute has provided studies and other information on the problems facing Social Security and the advantages of individual 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.