Abstract
This paper simulates a transition from the current pay-as-you-go Social Security system to a prefunded system based on Personal Retirement Accounts (PRAs). Annual PRA contributions of 2 percent of taxable payroll earning the historical return on the corporate sector are sufficient to close the financing gap projected for the Old-Age Survivors and Disability Insurance programs and to provide a modest increase in expected retirement income. Critically, the balance in the Social Security Trust Fund is positive and increasing at the end of the usual 75-year forecasting period, showing that the new system is solvent on a permanent basis. The simulations in this paper update the original plan discussed in Feldstein and Samwick (1998). The paper also discusses issues of portfolio risk, income distribution, and administrative costs of a system of PRAs.
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