NCPA - National Center for Policy Analysis

A Regulatory Framework For Personal Retirement Accounts

February 26, 2002

Social Security reform that includes the integration of personal retirement accounts into the current system will return to the limelight. As the debate moves forward, it is increasingly important that the discussion move beyond generalizations, toward detailed proposals about how personal accounts will work.

In a recent study, researchers Karl Borden and Charles Rounds suggest how individual accounts could be structured:

  • Workers could divert a portion of their Social Security payroll tax into a personal retirement account.
  • Workers would possess a property right to their account balances, and would be responsible for making certain investment choices.
  • Employers would continue facilitate the flow of funds and information, much as they do under the current system.
  • Private companies would manage the accounts, and a national clearinghouse -- similar to the National Association of Securities Dealers or the Depository Trust and Clearing Corporation -- would handle regulatory functions, and collect and distribute the funds.
  • The government's role would be limited primarily to overseeing the system, acting as a court of final appeal for dispute resolution and maintaining the fiscal integrity of the system.

Relying mainly on market-based structures to provide a framework for privatization would maximize flexibility and innovation. At the same time, establishing a centralized collection and management structure would allow economies of scale to minimize costs. According to Borden and Rounds, their structure balances the need for basic consumer protections with the desire for individual independence and freedom of choice.

Source: Karl J. Borden and Charles E. Rounds, Jr., "A Proposed Legal, Regulatory, and Operational Structure for an Investment-Based Social Security System," SSP No. 25, February 19, 2002, Cato Institute, 1000 Massachusetts Avenue, N.W. Washington D.C. 20001-5403, (202) 842-0200.

For Cato Institute report


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