Commission Endorses Individual Accounts, Calls for "Year of Debate"

December 17, 2001

The President’s Commission to Strengthen Social Security has formally endorsed a report that calls individually owned, privately invested accounts "central" to any effort to reform Social Security. The bipartisan commission unanimously approved the report, becoming the first Social Security in U.S. history to reach a unanimous agreement.

The commission offered three "illustrative" proposals showing different ways in which individual accounts could be created, while moving the system toward solvency. One plan would allow workers to divert 2 percentage points of their payroll taxes into individual investment accounts, but would otherwise leave the program unchanged. The second alternative would allow workers to privately invest 4 percentage points of their payroll taxes (up to $1,000 annually), while slowing the growth of future benefits within the traditional program by changing the benefit formula to keep pace with inflation, rather than wage growth. The third option would allow workers to privately invest 2.5 percentage points of their payroll taxes, but only if they also contribute 1 percent of payroll over and above the payroll tax. This option would restore solvency to the program through an infusion of general revenue, as well as a number of small changes in the benefit structure and incentives to work longer (Though no actual change in the retirement age).

All three proposals would give workers control and ownership over part of their retirement funds, while moving the program toward solvency. Under all three proposals, workers who choose the individual account option would likely end up with total benefits higher than what can be provided by the current system. Under proposals 2 and 3, benefits for low-wage workers and widows would be boosted significantly.

The commission stressed that the rationale for individual accounts goes beyond simply helping to restore solvency to the nation’s retirement system, but would, for the first time, open the promise of real wealth to all Americans. The commission noted that low-income workers and minorities often lack the ability to save, invest, and pass wealth on to their heirs. Individual accounts would make wealth and ownership nearly universal in America.

While restating the urgency of reform, the commission called for making 2002 a "year of debate" on the issue. As a result, interest groups can be expected to battle throughout the coming year in anticipation of legislative action in 2003. The intensity of that debate was foreshadowed by reaction to the commission’s report. Rep. Robert Matsui (D-CA) again called the commission part of a Cato Institute plot to destroy Social Security. When not blaming privatization on Cato, he also warned that it was "a gimmick for some on Wall Street to feather their nest." Meanwhile, groups ranging from the Institute for America’s Future to the National Council of Women’s Organizations warned of "massive benefit cuts." Notably, none of these groups offered their own proposals for Social Security reform.

Others were far more positive about the commission’s work. Representatives Jim Kolbe (R-AZ) and Charles Stenholm (D-TX) called the report "responsible and forthright." Several pro-reform groups, including Americans for Tax Reform, the Alliance for Worker Retirement Security, For Our Grandchildren, and the 60 Plus association, also praised the report.

The draft report will be finalized by commission staff over the next few days and formally released no later than December 23.

As always, the Cato institute video-recorded the commission meeting. The video will be posted soon.

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