Session: 34

Social Security

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Summary

This paper presents a unique approach to a totally privatized social security system. The main concept is a defined contribution account maintained by the government for each working individual. Individuals directly and affirmatively choose their targeted benefit at retirement, and then deposit the contributions likely to fund such target. The actual retirement benefit for each individual, however, is the actual accumulation of contributions and fund earnings, without any guarantees. Although the government will not supplement account balances upon retirement, it will make supplemental contributions to the accounts of indigent individuals, and others in limited circumstances, in the form of a welfare benefit subsidy.

Each individual self-directs the investments of his or her account, as restricted by government regulations. Each working individual, on an annual basis, will reassess their personal financial situation and will determine the desired retirement benefit. Then, the individual will calculate the contribution likely to fund such target. The government will issue the actuarial factors to be used to calculate the level contribution, when amortized over the individual's future working years, needed to fund the difference between the present value of the targeted benefit over his or her current account accumulation. If the individual can afford the calculated contribution level, then an irrevocable election on a government-issued form will be made. However, if the individual can't afford the necessary contribution, then he or she must either find ways to meet the contribution requirement or lower the targeted benefit based on the level of contributions which can be made. This requirement for annual reassessment shifts control of retirement income away from the government and directly to the individual, which is similar to the way that individuals control the amount they electively defer to a cash or deferred arrangement (i.e., an American 401(k) plan). Generally, the government will only be responsible for the proper administration of the private account system and will not interfere with any individual's chosen target benefit, investment directions or elected contribution levels. However, certain indigent individuals, working individuals who have periods of non-employment, and certain individuals who, without fraud, have insufficient accumulations just prior to retirement, can affirmatively request a supplemental contribution from the government which will physically be deposited into such individual's account. Since a government supplemental contribution would represent a true welfare benefit subsidy, all "means testing" is shifted away from the government and is placed directly within the control of each individual. This paper gives the general outline for such a program and states some issues which would need to be debated and resolved by governments to implement such a program. The paper assumes that a social security system is comprised entirely of individual target benefit accounts and does not offer suggestions for a transition from an existing defined benefit-type program into a target benefit-type program.

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I am an associate attorney at Bell, Boyd & Lloyd, LLC, Chicago, Illinois, USA, in its Employee Benefits and Executive Compensation group. Before receiving my J.D. and LL.M. (Employee Benefits) degrees from the John Marshall Law School in Chicago, Illinois, I earned my Enrolled Actuary, Chartered Financial Consultant and NASD Registered Representative professional designations. I am an adjunct professor at the John Marshall Law School and I teach classes in its Master of Laws (LL.M.) program in Employee Benefits. I am the founder and current co-chair of the Chicago Bar Association Young Lawyers Section Employee Benefits Task Force and have been honored for my leadership and expertise as a young lawyer by being named in the charter class of John S. Nolan Fellows of the American Bar Association Section of Taxation. My complete resume is online at http://www.barrykozak.com.

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