Workers would be permitted to set aside part of their Social Security payroll taxes in individual accounts for investment in stocks and bonds under a controversial proposal to be unveiled next month, the Los Angeles Times reported Friday.
The federally appointed Social Security Advisory Council will recommend that 5 percent of payroll taxes go into a personal security account, or PSA, for each worker, the Times said.The accounts would be mandatory but the workers could choose how the funds in them would be invested, much as they now have options under money put into companies' 401 retirement accounts.
The other 7.4 percent of payroll tax revenues would remain in the current system as a basic source of Social Security funding. The current Social Security payroll tax is 12.4 percent.
If Congress adopts the plan, it would be the biggest change in the Social Security system since it was created in 1935.
Currently, the payroll taxes paid by 125 million workers are invested in special-issue U.S. Treasury securities that have historically yielded far less in interest than corporate shares.
The semi-privatization plan has its critics because it would put more of the risk on individuals, who would have to choose their stock packages.
Other drawbacks are that low-wage workers would get reduced benefits from the government-invested portion of Social Security because higher-income workers would contribute less to the pot.
Also, a payroll tax hike or increased federal deficit would be needed to keep up with current benefits while about half the incoming money is diverted to individual accounts. The Times said it would cost $1.2 trillion over about 40 years to switch to the new system.
However, the plan's author, advisory council member Sylvester Schieber, said "everybody ends up getting higher benefits" under the proposal.
The Cato Institute, a conservative group that strongly supports the privatization plan, said a high-wage worker born in 1970 would get $1,908 in monthly retirement benefits under the current Social Security system but that could reach $11,729 a month if all the money were invested in stocks.
The advisory council report was originally due at the end of 1995 but sharp clashes among members delayed it. The Times, citing unidentified sources, said only six of 13 members support the idea of private accounts while the others are divided on two alternate plans. One would keep the current collection system but put 40 percent of revenues into stocks and bonds. The other would keep the current system but add a new 1.6-percent tax, with that money going into individual accounts.
If no plan gains a majority on the council, all three will be submitted.