Personal Retirement Accounts
Voluntary personal retirement accounts are individual accounts that allow workers to invest a portion of their Social Security payroll taxes in bond and stock funds. These accounts are owned by the individual investor, not by the government.
Personal retirement accounts offer younger workers the opportunity to receive higher benefits than the current system can afford to pay, and build a "nest egg" for retirement that the government cannot take away. Personal retirement accounts provide ownership and control, and can be passed on to loved ones. Personal retirement accounts would start gradually. Yearly contribution limits would be raised over time, eventually permitting all workers to set aside 4 percentage points of their payroll taxes in their accounts. Personal retirement accounts would be voluntary. Those who do not opt for a personal retirement account would continue to draw benefits from the traditional Social Security system, reformed to be permanently sustainable.
The system of personal retirement accounts would be similar to the Federal employee retirement program, known as the Thrift Savings Plan (TSP). Contributions would be collected and records maintained by a central administrator.
Personal retirement accounts would be invested in a mix of conservative bond and stock funds. Workers would be permitted to allocate their personal retirement account contributions among a small number of very broadly diversified index funds patterned after current TSP funds.
A young person who earns an average of $35,000 a year over his or her career would have nearly a quarter million dollars saved in his or her own account upon retirement. Personal retirement accounts would be protected from sudden market swings on the eve of retirement. To protect workers as they near retirement, personal retirement accounts would be automatically invested in the "life cycle portfolio" when a worker reaches age 47, unless the worker and his or her spouse specifically opted out by signing a waiver form stating they are aware of the risks involved. The life cycle portfolio would gradually shift the allocation of investments as the individual neared retirement so that it was weighted more heavily toward lower-risk bonds.
Personal retirement accounts would not be accessible prior to retirement. Account holders would not be allowed to make withdrawals from, take loans from, or borrow against their accounts prior to retirement.
Personal retirement accounts could not be emptied out all at once, but would be paid out over time, as an addition to traditional Social Security benefits. Security procedures would be established to govern how account balances would be withdrawn at retirement.
Personal retirement accounts could be passed on to loved ones, ensuring that no family gets shortchanged by Social Security just because a family member dies before or early in retirement.
Personal retirement accounts would not be eaten up by hidden Wall Street fees. Personal retirement accounts would be low-cost. Most of the administrative fees, estimated at 30 basis points, would be for recordkeeping, which would be done by the government, not investment management by Wall Street.
Best of all, personal retirement accounts would replace the empty promises of the current system with real assets of ownership. Unlike the so-called Social Security Trust Fund which Congress spends every year on other programs, personal retirement accounts would be owned by individuals. Congress couldn't touch the money.