Social Security’s day of reckoning is uncomfortably near. In 15 years it will pay out more in benefits than it collects in taxes, and the money in the purported trust fund has long been spent on other government needs. Social Security has gaping holes that cannot be fixed with only minor changes. But there is a solution, one that gives Americans more control over their own money, which means more freedom and more choices. And it’s a solution that Congress can start implementing now.

Supporters of reform know that waiting for the election before beginning the steps to reform is a luxury they cannot afford. Observers expect President Bush to again make this a central issue in his campaign this fall, allowing him to use the election results as a mandate for reform in 2005. For him to have any success in passing through Congress any Social Security reform, it is necessary for Congress to at least begin the process of proposing and vetting the various reform proposals currently under discussion.

To that end, Reps. Sam Johnson (R‑Tex.), Pat Toomey (R‑Penn.) and Jeff Flake (R‑Ariz.) introduced in recent days the “Individual Social Security Investment Program Act of 2004,” legislation based on a plan developed by the Cato Institute’s Project on Social Security Choice.

As with nearly all reform plans under consideration, private accounts play a crucial role. In this bill, individuals would be able to voluntarily invest their half of the payroll tax, amounting to the entire 6.2 percent worker contribution, into individual accounts. The remaining 6.2 percentage points of payroll taxes would be used to pay the transition cost and fund the Social Security disability and survivor benefits. Workers who choose to remain in the traditional system would have their benefit calculations gradually shift from wage indexing to price indexing starting by 2012.

Workers who choose the individual account option would receive a recognition bond based on the accrued value of their Social Security benefits, i.e., the value of what they have already contributed to the system. These bonds, redeemable at the normal retirement age, would be fully tradable in financial markets with proceeds being deposited in the worker’s account. This mechanism of recognizing past contributions is unique to this proposal.

The investment structure would be a three-tier system: Tier I would be a centralized, pooled collection. Tier II would offer limited investment options with a 60/40 stock/​bond default portfolio. For individuals who accumulate $10,000, Tier III would give a wider range of investment options. At retirement, individuals can purchase an annuity or take a programmed withdrawal. As long as either of these options provides an income above the minimum level, funds in excess could be taken out in a lump sum. The government would provide a safety net by guaranteeing a minimum benefit equal to 120 percent of the poverty level.

This bill shows that giving workers ownership of their savings and equipping them with tools to secure their retirement can be done in a fiscally responsible way. Meanwhile, it transforms the pay-as-you-go system into one oblivious to whatever demographic trends may arise.

Social Security has been one of the most popular government programs of all time, and politicians who attempt to change it in any way must proceed with caution. However, the current system simply cannot survive in its current state for much longer; to insist otherwise borders on demagoguery.

The bill proposed by Reps. Johnson, Toomey, and Flake dramatically improves the fiscal imbalance while bringing personal accountability into the Social Security system.