Social Security

The aging of the U.S. population poses a financial burden for the Social Security program. Some have suggested including individual retirements accounts as an element of Social Security reform. To help Congress better understand the potential implications of individual accounts, this report describes how such accounts could affect the (1) private capital and annuities markets as well as national savings, (2) potential returns and risks to individuals, and (3) disclosure and education efforts needed to inform the American people about such a program.

GAO noted that: (1) individual investment accounts could affect the capital markets in several ways; (2) as a source of funds for the accounts, most proposals use either the cash collected from social security taxes or federal general revenues; (3) as a result, the primary capital market effect is a purely financial one: borrowing in the Treasury debt market to provide funding for investment in private debt and equity markets; (4) although the annual flows are likely to be sizeable, both the private debt and equity markets should be able to absorb the inflow without significant long-term disruption; (5) there could eventually be a significant increase in the amount of new funds flowing into the annuities market; (6) however, the magnitude of annuity purchases is likely to build gradually over time as more retirees build larger balances, allowing the market sufficient time to adjust; (7) individual account proposals could also affect the level of financial resources available for private investment by increasing or decreasing national savings; (8) the extent to which individual accounts affect national savings will depend on how they are financed, the structure of the program, and any behavioral responses of businesses and individuals; (9) national savings is more likely to increase if: (a) the government funds would have been spent but instead are not; (b) the program is mandatory and prohibits pre-retirement distributions; and (c) households do not fully adjust their retirement saving; (10) to the extent that households use the opportunities offered by an individual account program to invest in private equities and debt rather than Treasury securities, they could increase both the returns they receive and the risks they face compared to the Social Security program; (11) although asset diversification offers mitigation against certain risks, the returns that individuals receive would depend on and vary with their investment choices and the performance of the private debt and equity markets; (12) most advocates of individual accounts state that the expected future returns on private investments would be much higher for individuals than the implicit return available under the Social Security program; (13) some argue that historical returns may not be a good predictor of future returns; and (14) to provide participants with a clear understanding of the purpose and structure of an individual account program, an enhanced educational program would be necessary.