This proposal requires no government revenue aside from what has already been promised to Social Security through payroll taxes and the obligations represented by the bonds in the Social Security Trust Fund. The plan creates personal retirement accounts that are funded partly by a small additional investment by participating workers and employers, and partly from payroll taxes workers have already paid and will continue to pay.

• All individuals who are working and have not yet reached retirement age will be able to set aside part of their earnings, up to the taxable maximum, in a personal retirement account (PRA). Specifically, PRA deposits will equal 10 percent of the first $7,650 in annual earnings, 3 percent of earnings between $7,650 and $55,000, and 1 percent of earnings above $55,000.
• Also, workers must make their own additional contribution, set initially at 1.25 percent of wages, to be matched by their employer.
• Over the next eight years, the worker’s contribution will rise to 1.75 percent (matched by the employer) and the amount of payroll taxes that can be diverted will fall. The contribution rates will remain at these levels until the costs of the program fall below the revenues based on the current tax rate.
• Lower-income workers will be able to divert more of their payroll taxes and make larger (PRA) deposits (as a percent of income) than higher-income workers. Specifically, low-income workers will be able to deposit 10 percent of their wages to PRA accounts each year, compared to 5 percent for average-income workers and 2.5 percent for the highest-income workers.
• To make the transition easier, employees and their employers could be allowed to meet their additional PRA contribution requirements by diverting contributions currently made to defined contribution plans, including 401(k) plans, for the first five years. Small businesses could also be allowed a year’s delay before matching their employee’s contributions
• Participation in the PRA system is voluntary; however, since there will be no increase in the Social Security payroll tax, those who choose to remain in the current system will have to accept lower benefits in future years as payroll tax revenues fail to keep pace with Social Security’s promises.
• Workers will invest in approved diversified funds that reflect the performance of the market as a whole, including stock funds, bond funds and government securities funds. The management of these funds will be subject to strict accounting and financial standards.
• The plan can be designed to make as little an impact on employers as possible. For example, all the administration and paperwork could be done internally at the Social Security Administration. However, employers would be allowed to make PRA contributions directly, much as they do with their 401(k) plans.
• Over time, the Social Security benefits paid by the government to workers who participate in the PRA system will be gradually reduced based on a predetermined schedule, so that PRA benefits gradually replace taxpayer-funded benefits. During retirement, individuals will receive two monthly checks — one from the Social Security Administration (as under the current system) and one from a private annuity.
• At the time of retirement, individuals will be required to use some or all of their PRA funds to purchase an annuity, such that the sum of the two checks equals 150 percent of the poverty level. As an alternative to purchasing annuities, workers could be allowed to make programmed withdrawals from their PRAs. This proposal has two explicit guarantees to PRA participants: (1) everyone at or near retirement will receive all promised Social Security benefits; and (2) everyone else who has participated full time in the labor force for 35 years will have a retirement income equal to at least 150 percent of the poverty level.
• Contributions to the PRAs made directly by workers would be made on an after-tax basis, with no taxes on accumulations or withdrawals.
• In recognition of the changing nature of marriage and family life, a community property approach will be applied to all PRA contributions. That is, PRA deposits will be divided fifty-fifty between a husband’s and wife’s accounts, regardless of who earned the wages.
• Retirees will be able to use their PRA balances, above the amount required for the minimum annuity, to purchase long-term care insurance and to pay for long-term care directly.