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A LEGAL AND OPERATIONAL FRAMEWORK FOR THE PRIVATIZATION OF SOCIAL SECURITY
KARL J. BORDEN
Professor of Financial Economics
University of NebraskaCHARLES E. ROUNDS, JR.
Professor of Law
Suffolk University Law School
OVERVIEW
Gradually, we are coalescing around an understanding that the nation's retirement system needs an overhaul. Social Security, as it is currently structured, creates no property rights and builds no pool of national wealth. It is, rather, a combined taxation scheme and welfare scheme, with the taxation and welfare elements of the system largely unrelated to each other. Given the Ponzi-like nature of the system, it is probable that sooner or later Social Security will be transformed into an investment-based system, citizens will enjoy property rights to their own accounts, and real wealth will accumulate to the benefit of all levels of our society. But what form will a privatized social security system take? Will the legal and regulatory structure that sustains a system of individual accounts look, for instance, more like the one that supports 401(k) Plans, or more like that which supports IRA's?
These questions, and others like them, are beginning to be asked. The focus of the debate, in fact, is very likely about to shift: away from questions of whether and when to discussions of how and how much. What is to be the legal, regulatory, and operational framework of a national investment-based Social Security system? Just how will funds flow from individuals into the system, who will run it, which government entities and private-sector institutions will be involved and how will they interact, to what extent will funds be taxed, who will write and enforce regulations, and what will be the legal and operational details of the system?
Getting from here to there will mean treading a perilous path through armies of accountants and attorneys who are going to try to regulate the new system into oblivion. What is more, the manner in which the basic law is framed constitutionally and the fundamental structure of the system that is created will be critical to its success or failure. It is time, we believe, to start paying attention to some of the details of the plan that is likely to emerge from the political process ahead of us.
In this paper we frame the broad outlines of an investment-based Social Security program that in our opinion best addresses, balances, and harmonizes the desire of the libertarian that there be reduced state regulation and the desire of the statist that government have a role in mitigating risks associated with market forces and human behavior. We start with a fundamental question: What is the constitutional basis for an investment-based Social Security system? The core of our proposal is something we call the Private Retirement Account or PRA. The reader will see that the PRA is closer to the IRA model than the 401k model. We then propose a fundamental regulatory structure that is designed to protect the system, minimize costs and maximize flexibility and innovation. Finally, we address several specific system elements that are critical to operational success: start-up funds-flow procedures, limits on investment discretion, marriage-and-divorce provisions, “hold harmless” status and the age of “retirement”, taxation of contributions and disbursements, and assignability and spendthrift provisions.
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©2002 Beacon Hill Institute for Public Policy Research at Suffolk University
