A mountain too far? The saga of Social Security personal accounts

Abstract

As a pay-as-you-go system, Social Security faces severe long-term financing challenges stemming from a rapidly growing retirement population, continued low fertility rates, and increased longevity. Unfortunately, the political debate in the U.S. over how to "fix" Social Security has become polarized. Republicans, led by the Bush Administration, have argued for partial advance funding of Social Security through the establishment of voluntary personal accounts and a scaling back of the index formula used to establish initial benefits for higher income workers. Democrats have vigorously attacked personal account proposals as attempts to "privatize" Social Security. After reviewing historical consideration of personal accounts and the current debate over them, the paper concludes that personal accounts funded through the diversion of payroll taxes supporting traditional benefits are not politically viable and are impeding bipartisan discussions over ways to address Social Security's solvency. The paper endorses a strategy proposed by Senator Robert Bennett (R-Utah) to engage in negotiations with Democrats over solvency measures separately from consideration of personal accounts. © 2005 The International Association for the Study of Insurance Economics.