Social Security

Some proposals to ensure the solvency of Social Security would add individual accounts, similar to defined contribution plans, to the current defined benefit plan. By themselves, however, such individual accounts cannot guarantee the system's solvency. The current system is designed to achieve both individual equity (some relationship between contributions made and benefits received) and retirement income adequacy (proportionately larger benefits to lower earners and households with dependents). These two goals are combined in a single defined benefit formula that bases retirement benefits on a worker's lifetime record of earnings, not on the payroll tax the worker contributed. Individual accounts would directly link a portion of the worker's contributions to benefits. This defined contribution structure would enable workers to earn a higher rate of return on their contributions but with some measure of risk. However, individual accounts would do nothing to help Social Security unless incremental investment income either supplemented Social Security revenues or offset current promised benefits. Decisions about the appropriate balance between the defined benefit and defined contribution portions will need to consider whether to make individual accounts mandatory or voluntary, who would manage the necessary information and money flow, how much flexibility individuals would have over investment options and access to their accounts, and the mechanisms for paying out retirement benefits.

GAO noted that: (1) social security forms the foundation of the nation's retirement income structure, and in so doing, provides critical benefits to millions of Americans; (2) yet, problems facing this program pose significant policy challenges that need to be addressed soon in order to lessen the need for more dramatic reforms in the future and to demonstrate the federal government's ability to deal with a known major problem before it reaches crisis proportions; (3) some social security proposals include adding individual accounts similar to defined contribution plans, to the current defined benefit program; (4) these individual accounts offer the potential for increased investment returns but they cannot by themselves restore social security's solvency without additional changes to the current system; (5) in assessing the proposals, policymakers must consider the extent to which the proposals offer sustainable financing for the system; (6) also, they must consider how to balance improvements in individual equity while maintaining adequacy of retirement income for those individuals who rely on social security as their primary or sole source of income; and (7) choosing whether to incorporate individual accounts into the social security system will require careful consideration of a number of design and implementation issues if such a system is to function effectively at a reasonable cost.