TCS Daily

A New Approach to Personal Social Security Accounts: "Your Own Trust Fund"

By Alex Pollock - May 17, 2005 12:00 AM

When the First Continental Congress proclaimed that it stood for "Life, Liberty and Property," it was linking ownership of property to liberty in a free society. Personal Social Security accounts as vehicles for the expansion of ownership are very much in keeping with this American tradition in political philosophy. We should seek to make such accounts a reality.

In the discussions of personal accounts, all proposals so far have begun with diverting cash from Social Security taxes, resulting in a diminution of receipts by the Treasury Department. Could personal accounts be created without diverting tax receipts? They could by "cutting out the middle man."

Consider the mandatory savings function of the Social Security system, which currently works as follows:

        A. Cash from the citizen, both directly from wages and indirectly as employer 
        contributions which could otherwise have been wages, is sent to the 
        government as Social Security taxes.

        B. Social Security cash goes to the U.S. Treasury.

        C. Treasury spends the cash.

        D. Treasury issues a Treasury debt obligation to the Social Security 
        trust fund. It is part of the total Treasury debt outstanding.

        E. The Social Security program promises to pay the citizen benefits later.

I suggest creating personal accounts without diverting any cash from payroll taxes. This could be achieved by changing the current structure in one key respect: the Treasury could issue bonds directly to personal accounts.

The personal accounts would thus be created by putting Treasury securities in them, not cash. The current Trust Fund is an unnecessary "middle man" role between the citizens and the U.S. Treasury, who are the only real principals involved. Cutting out this middle man makes the real relationship much clearer and more honest, while making the citizens direct owners of top quality retirement investments.

Such personal accounts would then work like this:

        A. Social Security taxes would be sent to the government, as they are 
        now. Treasury's cash receipts would be the same as they are now.

        B. Treasury would spend the cash, as it does now.

        C. Treasury would still issue a Treasury debt obligation, but to the citizen's 
        personal account, not to the trust fund.

Instead of the government having a trust fund which it owns, you would have a "personal trust fund" which you own.

There are perfect Treasury bonds for these accounts: Treasury Inflation Protected Securities (TIPS). Inflation poses the largest threat to retirement savings, and these default-free instruments also fully protect against that threat, thereby minimizing risk.

This should be a purely voluntary program; individuals could elect to remain in the current program or to receive TIPS in their personal accounts instead of future benefit payments of equal economic value. After a certain restricted period, individuals could choose to reinvest their assets in other financial instruments, although I believe many or most would simply stay with the TIPS.

Think how much more meaningful direct ownership of these Treasury bonds in a personal account -- in "your own trust fund" -- would be for American individuals and families than the obscure operations of the current trust fund which almost no one understands. This would be an extremely popular alternative -- simple, easy to understand, and attractive.

By analogy to the federal employees' thrift plan, it could be thought of as "a G-Fund for everybody." It could also be accurately seen as quite similar to payroll deductions to purchase savings bonds.

This approach to personal accounts would result in greater and more widely distributed ownership of financial assets among American households. It would provide assets with no default risk and no inflation risk, with the ability to pass them on to future generations. It would establish a stronger and more understandable financial relationship between government and citizens: Treasury securities are much more inviolable contracts than are off-balance sheet future political promises. It would address the political objections which have been made to personal accounts, as follows:

        1. There would be no cash shortfall to the Treasury.

        2. There would be no increase in the total national obligations. Treasury 
        debt owned by the public would increase, but Treasury debt owned by 
        the trust fund would decrease. Off-balance-sheet future benefit liabilities 
        would also decrease.

        3. There would be no need to market more Treasury debt -- the bonds 
        involved would automatically be privately placed in the personal accounts.

        4. No difficult choices would be imposed on individuals -- if they do nothing, 
        a very safe and appropriate retirement investment is automatically 

        5. There is no pressure to take risk or "roll the dice." TIPS are the exact 
        opposite of the rolling dice. In particular, they directly address the biggest 
        risk to retirement savings, namely inflation.

        6. The best way to make the promises of the government truly inviolable 
        is to make them into an explicit Treasury bond.

        7. The use of TIPS would allow a low cost, efficient book entry system.

Moreover, it is simple and easy to understand, I believe the majority of Americans would prefer to accumulate inflation-protected retirement assets they actually own. They should be given this choice.

Alex Pollock is resident fellow at the American Enterprise Institute


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