**ANALYSIS OF ISSUES						RELATING TO SOCIAL SECURITY					INDIVIDUAL PRIVATE ACCOUNTS**

Scheduled for a Public Hearing

Before the

SENATE COMMITTEE ON FINANCE****

on March 16, 1999

Prepared by the Staff

of the

JOINT COMMITTEE ON TAXATION

March 15, 1999

JCX-14-99

----

**CONTENTS**

**INTRODUCTION
**I.  OVERVIEW
**II.  OVERVIEW OF PRESENT-LAW RULES RELATING TO SOCIAL SECURITY, EMPLOYER-SPONSORED RETIREMENT PLANS, AND IRAs
		A.	Social Security

		B.	Cash or Deferred Arrangements ("Section 401(k) Plans")

		C.	Federal Thrift Savings Plan

		D.	Individual Retirement Arrangements ("IRAs")

**III.  DESIGN AND IMPLEMENTATION ISSUES RELATING TOINDIVIDUAL ACCOUNTS
		A.	Overview of Individual Accounts

		B.	Funding Sources and Allocation of Administrative Costs

		C.	Administrative Issues Relating to Investments

		D.	 Administrative Issues Relating to Contributions

		E.	Distributions from Individual Accounts

			1.	Access to funds prior to retirement			2.	Portability of account balances			3.	Form of distributions			4.	Coordination with Social Security			5.	Administrative issues with respect to taxation of distributions			6.	Miscellaneous distribution issues

		F.	Survivor and Spousal Rights

		G.	Interaction with Employer-Sponsored Retirement Plans

		H.	Other Administrative Issues

**IV.  ECONOMIC ISSUES RELATING TO PRIVATE ACCOUNTS
		A.	Private Account Accumulations and Annuity Values

		B.	General Economic Issues
			1.	Overview			2.	Impact on national saving			3.	Funding and tax treatment of IPAs; coordination of IPAs			 with Social Security			4.	Account investment issues

**V.  BACKGROUND INFORMATION RELATING TO RETIREMENT SAVINGS
		A.	Economic Status of the Elderly

		B.	Expected Retirement Income and Needs of Current Workers

		C.	Increases Retirement Costs

**VI.  BACKGROUND INFORMATION RELATING TO INTERNATIONAL EXPERIENCE WITH ALTERNATIVES TO PAY-AS-YOU-GO FINANCING OF SOCIAL SECURITY
		A.	Developed Countries
			1.	United Kingdom			2.	Australia			3.	Sweden

		B.	Newly Industrialized Countries
			1.	Chile			2.	Mexico			3.	Argentina

**INTRODUCTION**

The Senate Committee on Finance has scheduled a public hearing on March 16, 1999, onissues relating to personal retirement accounts.  This document,(1) prepared by the staff of the JointCommittee on Taxation, provides an overview of present-law rules relating to Social Securityand certain tax-favored retirement arrangements and discusses issues relating to individualprivate accounts.

	Part I of the document is an overview.  Part II provides an overview of the present-lawrules relating to Social Security, certain types of employer-sponsored retirement plans, andindividual retirement arrangements ("IRAs").  Part III discusses design and implementationissues relating to individual accounts.  Part IV discusses economic issues relating to privateaccounts.  Part V provides background information relating to retirement savings, and Part VIprovides background information regarding experience in other countries with alternatives topay-as-you-go financing for social security programs.

**I.  OVERVIEW
**Goals of private account proposals**

	The current interest in a new system of individual private accounts ("IPAs") owes itsorigin, at least in part, to the long-term funding issues of the current Social Security system. IPAs could be used as an alternative means of funding Social Security by coordinating SocialSecurity benefits with IPA accumulations.  IPAs could also be used to increase retirement savinggenerally (without coordination with Social Security), thereby reducing reliance on SocialSecurity for retirement income.  Under this approach, other changes to Social Security funding orbenefits would be needed to address the funding issues of Social Security.

**Design and implementation issues**

	IPA proposals raise many administrative issues.  A fundamental issue is who will beprimarily responsible for IPA administration.  Present law provides three basic models foraccount administration: government-held accounts; accounts based on employer-sponsoredsection 401(k) plans; and accounts based on individual retirement arrangements ("IRAs"). Regardless of the model adopted, any IPA proposal is likely to involve significantly the FederalGovernment, as well as possibly employers, financial institutions, and a variety of serviceproviders.

	The design and implementation issues raised by any IPA proposal include the following:
- 	How will contributions be funded (e.g., through projected budget surpluses,payroll taxes, or general revenues) and how will administrative costs be paid?
- 	How will investment decisions be made?
- 	How will contributions be collected and credited to IPAs, and how will funds betransferred to investment vehicles?
- 	When and how can distributions be made, how are distributions coordinated withSocial Security, and how are distributions taxed?
- 	What survivor and spousal benefits are to be provided? 
- 	How will the proposal impact employer-sponsored retirement plans?

**Economic issues**

	IPA proposals also raise a number of economic issues.  At the individual level, the keyissues concern how the accounts will be funded, how they will be taxed, what level ofaccumulations could be expected in the accounts at retirement, and what interactions, if any, theaccounts will have with Social Security.  At the national level, key issues are whether suchaccounts can be expected to increase national saving and whether they can be expected toprovide adequate retirement income (in conjunction with Social Security).  The combination ofdecisions with respect to funding, taxation, and interaction with Social Security will determinethe net effect of any IPA proposal on the overall progressivity of the Federal tax and benefitsystem, as well as on the intergenerational distribution of tax burdens.

**Background information relating to retirement savings**

	Currently, Social Security is the largest source of retirement income (39 percent in 1996),followed by wage and salary income (22 percent in 1996), private and government employeepensions and alimony (18 percent in 1996), and income from assets (17 percent in 1996).

	The adequacy of retirement income is commonly measured by the replacement rate, thatis, the ratio of retirement income to income during working years.  Available data indicate thatSocial Security and pension benefits replace roughly 33 percent of career high earnings and 50percent of earnings over the last 5 years of employment for current retirees. When spousalbenefits are taken into account, replacement rates are higher. Some recent research has estimatedthat, for workers retiring over the next 10 years, replacement rates for the median 10 percent ofhouseholds (45th to 55th percentiles ranked by income) may approach 97 percent in nominaldollars and 66 percent in real (inflation adjusted) dollars.  These replacement rates are higher forindividuals who had lower earnings.

	Although coverage by employer pension plans and Social Security is expected to behigher for current workers than for current retirees, the saving rate of current workers is lowerthan the rate at which current retirees saved during their working lives. Also, it is possible thatthe need for retirement income is increasing over time because of increases in life expectancies,trends toward early retirement, and rapid rises in medical costs.

**Experience of other countries**

	A number of other countries have adopted alternatives to pay-as-you-go financing fortheir social security programs.  These include the United Kingdom, Australia, Sweden, Chile,Mexico, and Argentina.

**II.  OVERVIEW OF PRESENT-LAW RULES RELATING TO SOCIAL SECURITY, EMPLOYER-SPONSORED RETIREMENT PLANS, AND IRAs
**A.  Social Security(2)**

**In general**

	The Old-Age, Survivors, and Disability Insurance ("OASDI") programs provide monthlybenefits to retired and disabled workers, or their dependents and survivors. The primary source ofrevenue for OASDI is a payroll tax paid by workers covered under the program and theiremployers. Generally, coverage is compulsory and nearly universal.(3)

**Eligibility and participation**

	Currently, an estimated 96 percent of the Nation's paid work force is covered eithervoluntarily or mandatorily.

**General benefit structure**

        Insured status

	Benefits can be paid to workers, and their dependents or survivors, only if the worker hasworked long enough in covered employment to be insured for these benefits. Insured status ismeasured in terms of  "quarters of coverage."  Since the beginning of 1978, the crediting ofquarters of coverage has been on an annual rather than a quarterly basis up to a maximum of fourquarters of coverage per year. The amount of annual earnings needed for a quarter of coverage isincreased each year in proportion to increases in average wages in the economy. In 1999, theamount of earnings needed for a quarter of coverage is $740. Therefore $2,960 of wages isnecessary to attain four quarters of coverage in 1999.

	Under the OASDI program, there are two types of insured status: "fully insured" and"currently insured."  Generally, workers are fully insured for benefits for themselves and for theireligible dependents if they have 40 quarters of coverage.  If they do not have 40 quarters ofcoverage, they can still be fully insured if they have a minimum of six quarters of coverage withat least one quarter of coverage for each year after the year they reached age 21 up to the year inwhich they reach age 62, become disabled, or die.  The portion of the requirement for fully-insured status that each worker have a minimum of six quarters of coverage is increaseddepending on the age of the worker.  Fully-insured status is required for eligibility for all types ofbenefits except certain survivor benefits.

	Survivors of a worker who was not fully insured may still be eligible for benefits if theworker was currently insured. For this purpose, a worker is currently insured if the worker hassix quarters of coverage during the thirteen calendar quarters ending with the quarter in which theworker died. Survivor benefits are described more fully below.

	Workers are insured for disability if they are fully insured and have a total of at least 20quarters of coverage during the 40-quarter period ending with the quarter in which they becamedisabled. Workers who are disabled before age 31 are insured for disability if they have totalquarters of coverage equal to the greater of six quarters of coverage or quarters of coverage equalto one-half the calendar quarters which have elapsed since the worker reached age 21, ending inthe quarter in which they became disabled.

        Benefits in general

	All monthly benefits are computed based on a worker's primary insurance amount("PIA").  The PIA is a monthly amount based on the application of the Social Security benefitformula to a worker's average lifetime covered earnings. It is also the monthly benefit amountpayable to a worker who retires at the full retirement age, or becomes entitled to disabilitybenefits.

        Full retirement age

	Benefits for retired workers, aged spouses, and surviving spouses taken before the "fullretirement age" are subject to an actuarial reduction.  The full retirement age is the earliest age atwhich unreduced retirement benefits can be received.  The full retirement age currently is age 65,but it will gradually rise in two steps beginning in the year 2000. First, the full retirement agewill increase by two months for each year that a person is born after 1937, until it reaches age 66for those who were born in 1943. Second, it will increase again by two months for each year thata person is born after 1954, until it reaches age 67 for those who were born after 1959. Earlyretirement still will be available, beginning at age 62 for workers and their spouses, and at age 60for widow(er)s, but benefits will be lower. The actuarial reduction on retirement benefits at age62 ultimately will be 30 percent, instead of the present 20 percent.  The age for full benefits foraged spouses and surviving spouses likewise will rise to 67.

	Benefits of workers who choose to retire after their full retirement age are increased bydelayed retirement credits, as are the benefits payable to their surviving spouses.  The delayedretirement credit is one percent per year for workers who attained age 65 before 1982, and one percent per year for workers who attained age 65 between 1982 and 1989. Starting in 1990, thedelayed retirement credit increases by one-half of one percent every other year until it reacheseight percent for workers reaching age 65 after 2007.

        Benefit formula

	Except for workers who are eligible for a "special minimum benefit," the PIA isdetermined through a formula applied to the worker's average indexed monthly earnings("AIME").  The AIME is a dollar amount that represents the average monthly earnings fromSocial Security-covered employment over most of the worker's adult life indexed to the increasein average annual wages.  For a worker becoming eligible in 1999, the PIA is 90 percent of thefirst $505 of AIME, plus 32 percent of $505 through $3,043 of AIME, plus 15 percent of AIMEover $3,043.

        Special minimum benefit

	The special minimum benefit is not based on the amount of the worker's AIME, butinstead on the worker's number of years of covered employment.  It is structured to provide alarger benefit than would otherwise be payable to those who worked in covered employment formany years but had low earnings.  The special minimum benefit in 1999 ranges from $27.90 permonth for workers with 11 years of covered wages to $567.00 per month for workers with atleast 30 years of covered wages.

        Earnings limit

	Senior citizens age 70 and older, and disabled individuals, regardless of age, are eligibleto receive full Social Security benefits regardless of the amount of earnings they have fromwages or self-employment. Those between the full retirement age (currently age 65) and age 70receive full benefits only if their earnings are lower than an earnings limit amount determined bylaw.  Those below full retirement age have a separate earnings limit. In 1999, the earnings limitfor those below the full retirement age is $9,600.  The earnings limit is indexed to the rise ofaverage wages in the economy.  Those below full retirement age (currently, age 65) lose $1 ofbenefits for every $2 in wages or self-employment income they earn over the limit. In 1999, thelimit for those age 65 to 69 is $15,500.  This earnings limit will increase to $17,000 in 2000,$25,000 in 2001 and $30,000 in 2002.  Senior citizens between the age of full retirement(currently age 65) and 70 who earn more than the earnings limit lose $1 in benefits for every $3in wages or self-employment income they earn over the limit.

**Funding and contributions**

        Financing mechanism

	The primary source of revenue for the OASDI program is the payroll tax paid by workerscovered by the program and their employers.  Coverage under Social Security is generallycompulsory.

	The taxes for wage and salaried workers are imposed under the Federal InsuranceContributions Act ("FICA," chapter 21 of the Internal Revenue Code).  Taxes are based onearnings up to the annual maximum taxable wage base ($72,600 in 1999 for OASDI).(4)  Theemployee share of the OASDI payroll tax is withheld from wage and salary payments, and ismatched by employers.  The current rate for employers and employees is 6.2 percent each for acombined FICA tax rate of 12.40 percent.(5)  Self-employed individuals are covered by theSelf-Employment Contributions Act ("SECA," chapter two of the Internal Revenue Code).  Suchindividuals pay contributions on their net earnings annually up to the same maximum asemployees, but at a rate that is equal to the combined employee-employer tax rate.  However, theself-employed are allowed a deduction from their net earnings in computing their Social Securitytax(6) and may also deduct half of their Social Security tax as a business expense for income taxpurposes.  These deductions have the effect of equalizing the payroll tax burden between wageand salaried workers and the self-employed.

	Tax liability under the OASI and DI portion of the tax is credited to the Old-Age andSurvivors Insurance Trust Fund and the Disability Insurance Trust Fund, respectively.(7)  Inaddition, the income tax liability attributable to the taxation of Social Security benefits is creditedto the respective trust funds (for additional detail, see section on "Tax Treatment of SocialSecurity benefits," below).  The trust funds are the source of payment for: (1) monthly benefitswhen the worker retires, becomes totally disabled, or dies and (2) administrative expenses for theprogram.

**Investments**

	Social Security taxes flow into the U.S. Treasury, through depository accountsmaintained by the government in financial institutions across the country, with each program'sshare credited to separate trust funds (one for OASI, another for DI).  The crediting occursthrough the posting of interest bearing Federal securities in the appropriate fund (the interest rateis the same as the average rate prevailing on outstanding Federal bonds with a maturity of fouryears or longer).  These securities enjoy the full faith and credit of the United States Governmentas do any other Treasury bond.  When the government makes payments of Social Securitybenefits, it posts a reduction in the appropriate fund.  These Social Security benefit checks arepaid from the U.S. Treasury.  Currently, there are no other investment options allowed for SocialSecurity taxes.

**Distributions**

	As described in detail above, Social Security provides benefits only at retirement, deathor "disability."  Further, the program does not provide any mechanism for workers or theirfamilies to borrow against future benefits. Benefits are paid monthly.  Retirement, disability andother benefits for a surviving spouse are generally payable for the participants lifetime.

**Disability, spousal and survivor benefits**

	Dependents' benefits are payable in addition to benefits payable to the worker. Individuals eligible for both these dependents' benefits and benefits under their own work historywould receive the greater of the two benefits.

        Disability benefits

	Disability benefits are computed as if the worker reached full retirement age on the daythe worker became totally disabled (i.e., using 100 percent of the worker's PIA).  Generally,disability is defined as the inability to engage in "substantial gainful activity" by reason of aphysical or mental impairment.  There are also special definition and eligibility requirements forpersons who are blind.  There is no minimum age requirement for disability benefits.

        Spouse's benefits

	A benefit is payable to a spouse of a retired or disabled worker under one of the followingconditions: (1) the spouse and the worker are currently married and the spouse is at least 62 or iscaring for one or more of the worker's entitled children who are disabled or have not reached age16; or (2) a divorced spouse is at least 62, is not married, and the marriage had lasted at least 10years before the divorce became final.  Subject to the maximum family benefit limitation andreduction for early retirement, the spouse's benefit is limited to 50 percent of the PIA.  Adivorced spouse may be entitled independently of the worker's retirement to benefits, if both theworker and divorced spouse are age 62, and if the divorce has been final for at least two years.

        Survivor's benefits

Surviving spouse's benefit.--A monthly survivor benefit is payable to a surviving ordivorced spouse of a worker who was fully insured at the time of death. The surviving ordivorced spouse must be unmarried (unless the remarriage occurred after the surviving spousefirst became eligible for benefits as a surviving spouse); and must be either (1) age 60 or older or(2) age 50-59 and disabled.

Child's benefit.--A monthly benefit is payable to certain unmarried dependents, (i.e., abiological or adopted child, stepchild, and grandchild) of a retired, disabled, or deceased workerwho was fully or currently insured at death.  Dependency is deemed for the insured's biologicalchildren and most adopted children.  The child must be either: (1) under age 18; (2) a full-timeelementary or secondary student under age 19; or (3) a disabled person age 18 or over whosedisability began before age 22.

Surviving parent's benefit.--A monthly survivor benefit is payable to a surviving parent,whether or not divorced from the deceased worker, if: (1) the deceased worker on whose accountthe benefit is payable was fully or currently insured at time of death; and (2) the surviving parentis not married and has one or more entitled children of the deceased worker in his or her care. Inthe case of a surviving divorced mother or father, the child must also be the applicant's natural orlegally adopted child.  These payments continue as long as the youngest child being cared for isunder age 16 or disabled.

Parent's benefit.--A monthly survivor benefit is payable to a parent of a deceasedfully-insured worker who is age 62 or over, and has not married since the worker's death. Theparent must have been receiving at least one-half of her support from the worker at the time ofthe worker's death or, if the worker had a period of disability which continued until death, at thebeginning of the period of disability.

Percentage of PIA used in calculating survivor's benefits.--Subject to the maximumfamily benefit limitation and reduction for early retirement, the following survivor's benefits aregenerally limited to: (1) 100 percent (75 percent if age 62 but not age 65) of the PIA forwidow(er)s age 65; (2) 75 percent of the PIA for children, mothers, and fathers; and (3) 82.5percent of the PIA for a dependent parent aged 62 or more.

Lump-sum death benefit.--A one-time lump-sum benefit of $255 is payable upon thedeath of a fully or currently-insured worker to the surviving spouse who was living with thedeceased worker or was eligible to receive monthly cash survivor benefits upon the worker'sdeath. If there is no eligible spouse, the lump-sum death benefit is payable to any child of thedeceased worker who is eligible to receive monthly cash benefits as a surviving child.  If there isno surviving spouse, or children of the worker eligible for monthly benefits, then the lump-sumdeath benefit is not paid.

Maximum family benefit.--The maximum monthly amount that can be paid on a worker'searnings record varies with the PIA.  For benefits payable on the earnings records of retired ordeceased workers, the maximum varies from 150 to 188 percent of the PIA.  The familymaximum cannot be exceeded regardless of the number of recipients entitled on that earningsrecord.

**Miscellaneous administrative issues**

	The cost of administering the Social Security programs are financed from the SocialSecurity Trust Funds, subject to annual appropriations.  Traditionally, these costs comprise lessthan one percent of annual benefit payments.

**Tax treatment of Social Security benefits**

	Taxpayers receiving Social Security benefits are required to include portion of suchbenefits in gross income if their "provisional income" exceeds $25,000, in the their case ofunmarried taxpayers, or $32,000, in the case of married taxpayers filing joint returns. Forpurposes of these computations, a taxpayer's provisional income is defined as adjusted grossincome ("AGI") plus: (1) tax-exempt interest; (2) certain amounts excluded under adoptionassistance programs and educational savings bonds; (3) the deduction for qualified student loaninterest; (4) certain foreign source income; and (5) one-half of the taxpayer's Social Securitybenefit. A second-tier threshold for provisional income is $34,000, in the case of unmarriedtaxpayers, or $44,000, in the case of married taxpayers filing joint returns.

	If the taxpayer's provisional income exceeds the lower threshold but does not exceed thesecond-tier threshold, then the amount required to be included in income is the lesser of (1) 50percent of the taxpayer's Social Security benefit, or (2) 50 percent of the excess of the taxpayer'sprovisional income over the lower threshold.

	If the amount of provisional income exceeds the second-tier threshold, then the amountrequired to be included in income is the lesser of: (1) 85 percent of the taxpayer's Social Securitybenefit; or (2) the sum of (a) 85 percent of the excess of the taxpayer's provisional income overthe second-tier threshold, plus, (b) the smaller of (i) the amount of benefits that would have beenincluded if the 50-percent inclusion rule (the rule in the previous paragraph) were applied, or (ii)one-half of the difference between the taxpayer's second-tier threshold and lower threshold.

	As noted above, the revenue derived from the income taxation of a portion of SocialSecurity benefits is credited to the Social Security trust funds.

**B.  Cash or Deferred Arrangements						("Section 401(k) Plans")**

**In general**

	A qualified cash or deferred arrangement is a type of tax-qualified employer-sponsoredretirement plan.(8)  Cash or deferred arrangements are called section 401(k) plans after the sectionof the Internal Revenue Code (the "Code") governing such arrangements.  The distinguishingfeature of a section 401(k) plan is that employees can elect to make pre-tax contributions to theplan in lieu of receiving cash compensation.  Contributions made at the election of the employeeare referred to as elective deferrals.  For Federal tax purposes, employee elective deferrals aregenerally treated as employer contributions.

	Like all qualified retirement plans, section 401(k) plans receive favorable tax treatment. Employer contributions to the plan (including elective deferrals) are currently deductible;however, employees are not taxed on plan benefits until received.  In exchange for favorable taxtreatment, section 401(k) plans are subject to a variety of rules.(9)  Many of these rules apply toqualified plans generally; while some rules apply only to section 401(k) plans.

**Eligibility for participation**

	Subject to certain restrictions, the employer decides who is eligible to participate in aqualified plan.  Thus, subject to those restrictions, an employer can limit 401(k) participation in aqualified plan to certain groups or classifications of employees.

	Under the Federal tax laws, a section 401(k) plan may not require that an individualcomplete more than one year of service before being eligible to participate in a section 401(k)plan.  In addition, a qualified plan cannot require that an individual be older than age 21 in orderto participate.

	Section 401(k) plans, like all qualified retirement plans, are subject to nondiscriminationand coverage rules designed to ensure that the plan benefits a broad cross-section of employees,not just the employer's highly compensated employees.  These rules may operate to restrict theparticipation choices of the employer.  For example, if an employer restricts participation in aqualified plan only to top executives, the plan would likely fail the coverage andnondiscrimination tests.

**General benefit structure**

	Section 401(k) plans are a type of defined contribution plan.  Under a definedcontribution plan, a participant's benefit is the participant's account balance.  That is, the benefitis equal to contributions, as adjusted by investment gains and losses.  The participant bears therisk of investment losses.

**Funding and contributions**

	There are four types of contributions that may be made to a section 401(k) plan.  First,employees may make elective deferrals.  Second, the employer may make matchingcontributions to the plan based on the employees' elective deferrals.  For example, an employermight match 50 percent of employee elective deferrals up to 3 percent of compensation.  Third,the employer may make nonelective employer contributions, i.e., employer contributions that arenot dependent on the elective deferrals made by employees.  Finally, employees may make after-tax contributions to the plan.  Each of these types of contributions are subject to certain limitsunder the Code.  Subject to these limits, the plan provisions specify the kind and level ofpermitted contributions.

	The maximum amount of elective deferrals that can be made by an employee to a section401(k) plan for a year is $10,000 (for 1999).  Elective deferrals are subject to a specialnondiscrimination test that limits the deferrals that can be made by highly compensatedemployees by the amount of deferrals made by nonhighly compensated employees.  This 

nondiscrimination test, and the dollar limit on elective deferrals, may limit contributions thatwould otherwise be made to the plan, particularly by highly compensated employees.  Matchingcontributions that meet certain requirements and nonelective contributions may be taken intoaccount in applying the special nondiscrimination test for section 401(k) plans.  Some employersmake matching contributions in order to make the plan more attractive, even if the contributionsare not taken into account in applying the special nondiscrimination test.(10)

	Matching contributions and employer nonelective contributions are not subject to aspecific dollar limit.  However, there is an overall limit on the annual additions that can be madeto an employer's plans on behalf of an employee.  This limit is the lesser of 25 percent ofcompensation or $30,000.  Matching contributions, employer nonelective contributions, as wellas employee elective deferrals are taken into account in applying this limit.  Limits on theamount an employer can deduct for contributions to a qualified plan may also limit thecontributions made to the plan.

	Employee elective deferrals must be 100 percent vested.  If employer matching andnonelective contributions are taken into account in applying the special nondiscrimination testfor section 401(k) plans, then they must be 100 percent vested.  Otherwise, such contributionsmust vest at least as rapidly as under one of two vesting schedules applicable to qualified plansgenerally.(11)

	All qualified plan assets must be held in trust for the exclusive benefit of participants andtheir beneficiaries.  Under Department of Labor regulations, elective deferrals generally must beheld in trust no later than 15 business days after the end of the month in which the contributionsare received by the employer or would have been paid to the employee in cash if not withheldfrom wages.

**Investments**

        In general

In general, account balances in a section 401(k) plan can be invested in one of three ways: (1) by a plan fiduciary; (2) pursuant to participant direction; or (3) as directed by the plandocument.  It is common for section 401(k) plans to provide at least some participant-directedinvestment.  The same investment method need not be used for all contributions.  For example, aplan could provide that participants can direct the investment of their elective deferrals, but notmatching contributions.

        Investment by plan fiduciary

Plan assets may be invested by a plan fiduciary.  In general, Federal law does not restrictthe types of investments that can be made by a plan, but rather imposes a general fiduciary duty. Under ERISA, plan fiduciaries are required to discharge their duties (1) solely in the interest ofplan participants and beneficiaries, (2) for the exclusive purpose of providing benefits anddefraying reasonable administrative expenses, (3) with the care, skill, prudence and diligenceunder the circumstances then prevailing that a prudent man acting in a like capacity and familiarwith such matters would use in the conduct of an enterprise with like character and like aims, (4)by diversifying investments so as to minimize the risk of large losses, unless under thecircumstances it is clearly prudent not to do so, and (5) in accordance with the instrumentsgoverning the plan insofar as such instruments are consistent with ERISA.

	In addition to the general fiduciary standard, ERISA and the Code prohibit certaintransactions between a plan and certain parties closely associated with a plan.

	Plan fiduciaries are liable to the plan for any investment losses as a result of a breach offiduciary duty.

        Participant-directed investments

	Although plans can give participants complete investment discretion, it is more commonfor plans to provide a limited range of alternatives with varying degrees of risk and possiblereturns.  Permitting total investment discretion typically involves greater administrative costs, aswell as a high degree of investment experience on the part of plan participants.

	If a participant has complete control over investments, then plan fiduciaries cannot beheld liable for losses resulting from the exercise of that control.  In addition, if certainrequirements are satisfied, then plan fiduciaries are not liable for losses resulting from morelimited participant control over investments.  In order for this exception from the fiduciary rulesto apply, among other things, the plan must offer at least 3 investment alternatives that togetheroffer a broad array of investment alternatives.

	Plans that permit participant directed investments must adopt rules that deal with variousissues such as a default investment in case the participant fails to make an investment electionand how to make changes in investments.

        Investment pursuant to plan provisions

	Plans will sometimes provide that certain funds are to be invested in certain assets,typically securities of the employer adopting the plan.

        Administrative costs

	Section 401(k) plans have a variety of administrative costs, including investment fees,fees relating to the sending of notices, trustee fees, employee communication fees and other feesassociated with the adoption and operation of a plan.  Plan fees generally can be paid directly bythe employer, or by the plan and allocated among plan participants.  Most section 401(k) planscharge at least a portion of administrative expenses to plan participants.

**Distributions**

        Timing of distributions

	All qualified plans, including section 401(k) plans, must provide that, unless theparticipant elects otherwise, benefit payments under the plan will begin no later than 60 daysafter the plan year in which the last of the following occurs: (1) the participant attains the earlierof age 65 or the normal retirement age specified under the plan; (2) the participant's 10thanniversary of plan participation; or (3) termination of service with the employer.  This ruleensures that plans cannot indefinitely defer the commencement of benefits beyond retirementage.  Section 401(k) plans typically provide for payment of benefits upon separation fromservice.

	Qualified plans, including section 401(k) plans, also cannot cash out benefits without theparticipant's consent if the participant's benefit exceeds $5,000.  This rule is designed to helpkeep retirement benefits in a tax-favored retirement vehicle until needed for retirement.

	Section 401(k) plans are also subject to certain rules designed to help ensure that planbenefits are available for retirement purposes.  Thus, distributions of amounts attributable toemployee elective deferrals cannot be distributed earlier than (1) separation from service, deathor disability, (2) the attainment of age 59-1/2, or (3) hardship.(12)

	While section 401(k) plans do not have to provide for in-service distributions (i.e.,distributions before retirement, separation from service, death or disability), it is common forsuch plans to allow for hardship withdrawals.  Under present law, in general, a distribution ismade on account of hardship only if it is made on account of an immediate and heavy financialneed and is necessary to satisfy the financial need.  A distribution is deemed to be on account ofa heavy and immediate financial need if the distribution is for the purchase a principle residence(excluding mortgage payments), payment of education expenses, medical expenses, or to preventeviction.  The ability to make hardship withdrawals is an attractive plan feature to planparticipants, even if they never take a hardship withdrawal.  Allowing such withdrawals imposes 

administrative burdens on the plan, which must ensure that the distribution satisfies the criteriafor a hardship withdrawal.

	Present law requires that minimum distributions from all qualified plans, includingsection 401(k) plans, generally must begin by the later of (1) retirement or (2) attainment of age70-1/2.  This rule reflects the idea that qualified plans are intended to provide for retirementincome, not deferral of income beyond retirement.

        Form of distributions

	Section 401(k) plans are not required to provide for distributions in any particular form. Plans typically offer a lump-sum option, and may also provide for payments over a period ofyears, such as over the life expectancy of the participant and his or her beneficiary.  Planstypically limit the distribution options in order to minimize administrative burdens.  Most section401(k) plans do not offer annuity options because of the increased administrative burdensassociated with annuities.  For example, plans that offer an annuity are subject to joint andsurvivor requirements described below.  Individuals who want to defer payment of benefitsbeyond the period provided by the plan can take a lump-sum distribution and roll the distributionover into an IRA.  Distributions from the IRA then can be taken over a period of years.

        Loans

	Qualified plans may permit individuals to obtain a loan from the plan, provided certainrequirements are made with regard to the amount of the loan and repayment terms.  In addition,such loans must bear a reasonable rate of interest and be adequately secured; the account balanceis frequently used as security for the loan.  If the participant does not repay the loan (i.e.,defaults) then the amount of the unpaid loan is deducted from the participant's account balance. Many section 401(k) plans offer loans, sometimes in addition to hardship withdrawals.

        Taxation of distributions

Distributions from section 401(k) plans are includible in income in the year received.  Inaddition, distributions prior to attainment of age 59-1/2, death or disability are subject to anadditional 10-percent early withdrawal tax, unless an exception to the tax applies.  Exceptions tothe tax applicable to section 401(k) plans include certain periodic distributions, distributionsupon separation from service after age 55, and distributions for medical expenses in excess of 7.5percent of adjusted gross income.

	Distributions from section 401(k) plans (other than certain periodic distributions) can berolled over tax free to an IRA (other than a Roth IRA).

**Survivor, disability and spousal benefits**

        Disability benefits

Section 401(k) plans typically do not provide a special disability benefit.  However,disability is generally an event that allows the participant to obtain distributions from the plan.

        Survivor and spousal benefits

	The spousal benefits that must be provided under a section 401(k) plan depend onwhether or not the plan offers an annuity as a form of benefit.  If the plan offers an annuity andthe participant elects the annuity option, then benefits must be paid in the form of a qualifiedjoint and survivor annuity that provides a survivor annuity to the participant's spouse, unless theparticipant and his or her spouse elect otherwise.  A qualified joint and survivor annuity pays anannuity for the life of the participant, with a survivor annuity which is not less than 50 percent(and not more than 100 percent) of the amount of the annuity payable during the joint lives of theparticipant and his or her spouse.  If the plan does not offer an annuity (or the participant doesnot elect the annuity option), the spousal rights are more limited; in such cases the spouse mustbe the participant's beneficiary, unless the spouse consents to another beneficiary.  Most section401(k) plans do not offer an annuity as a form of benefit because doing so increases planadministrative responsibilities.

	Unless a section 401(k) plan offers an annuity, there is no specified death benefit.  Rather,the participant's beneficiary is entitled to the remaining account balance upon the participant'sdeath.

	Section 401(k) plan benefits, like other qualified plan benefits, are subject to divisionupon divorce or separation.

**Enforcement**

	There are a variety of ways in which the rules applicable to section 401(k) plans can beenforced, both under the Internal Revenue Code and ERISA.  In general, the sanction for failureto meet the requirements applicable to all qualified retirement plans is plan disqualification. However, disqualification is a harsh sanction that can adversely affect plan participants.  In mostcases, the Internal Revenue Service utilizes administrative remedies in lieu of disqualificationthat attempt to correct the error involved.

	Some rules relating to qualified plans are enforced through tax sanctions other thandisqualification.  For example, a 15-percent excise tax is imposed on prohibited transactionsbetween a qualified plan and certain persons.  The excise tax increases to 100 percent if thetransaction is not corrected within a certain period.

	ERISA permits participants, plan fiduciaries and the Department of Labor to bring suit toenforce ERISA's various requirements.  In some cases, criminal penalties apply.

	In addition, under ERISA, all tax-qualified plans are required to include a claimsprocedure pursuant to which a participant or beneficiary can challenge a denial of benefits underthe plan.  The claims procedure must afford a reasonable opportunity for a full and fair review bythe appropriate plan fiduciary.

**Miscellaneous administrative issues**

	Both the Code and ERISA contain a variety of other administrative rules that must becomplied with.  For example, certain reporting and disclosure rules apply.

**C.  Federal Thrift Savings Plan(13)**

**In general**

	The Thrift Savings Plan ("TSP") is a section 401(k) plan for Federal employees.  TheTSP is generally subject to the same rules that apply to section 401(k) plans of privateemployers.  The TSP is sometimes used as a model for section 401(k) plans.  The TSP wasdesigned primarily for Federal employees who are participants in the Federal Employees'Retirement System ("FERS") to supplement the FERS basic annuity benefit.

**Eligibility for participation**

	Certain groups of Federal employees are eligible to participate in the TSP.

**General benefit structure**

	Like all defined contribution plans, the participant's benefit under the TSP is equal to theparticipant's account balance.

**Funding and contributions**

	The contribution levels for Federal employees varies based on the agency employing theemployee and the retirement system covering the employee.  All FERS employees maycontribute either a percentage of basic pay each pay period or a fixed dollar amount to the TSP,subject to the elective deferral limit under the Federal tax laws.  If the employee does contributeto the TSP, the employee may receive agency matching contributions on employee contributionsof up to four percent of basic pay each pay period.  The match is dollar for dollar on the firstthree percent of pay contributed by the employee and 50 cents on the dollar on the next twopercent.  The Federal Government also makes a one percent nonelective contribution to the TSPfor all FERS employees, whether or not the employee makes a separate elective deferralcontribution.

**Investments**

	Each TSP participant may choose to invest any part of his or her account in the three TSPinvestment funds: (1) the government securities investment fund (the "G fund"); (2) the commonstock index investment fund (the "C fund"); or (3) the fixed income index investment fund (the"F fund").(14)  The TSP allows for investment in one or more of the funds as a part of the worker'sregular contributions.  It also allows the worker to move existing fund balances in an interfundtransfer during two open seasons held each year.

	The G fund is managed by the Federal Retirement Thrift Investment Board (the "Board"). Its assets are held in trust in the U.S. Treasury.  The G fund consists almost exclusively ofinvestments in short-term non-marketable U.S. Treasury securities specially issued to the TSP.

	The C fund is managed by Barclay's Global Investors, which holds the assets in trust andacts as the investment manager.  The C fund is invested primarily in the Barclay's Equity IndexFund, a commingled stock index fund that tracks the Standard & Poors 500 ("S&P 500") stockindex.

	The F fund also is managed by Barclay's Global Investors.  The F fund is investedprimarily in the Barclay's U.S. Debt Index Fund, a commingled bond index fund designed totrack, as closely as possible, the Lehman Brothers Aggregate ("LBA") index.  The LBArepresents the U.S. Government, corporate and mortgage-backed securities sectors of the fixed-income securities market.

**Distributions**

	A withdrawal from the TSP generally may not be made until the worker has separatedfrom Federal service.  An exception is made for certain financial hardships.  The worker can havethe payments begin immediately or at a later date, but tax penalties may apply if the workerseparates from employment or retires before the year in which he turns 55 and withdraws fundsbefore age 59-1/2.  The TSP provides three basic ways to withdraw from the worker's account.(15) The three options are to:

	(1)	receive a single payment equal to the balance in the worker's TSP account;

	(2)	receive the account balance in a series of monthly payments.  Options includepayments for a fixed number of months, monthly payments for a fixed dollaramount until the account is depleted, or monthly payments based on the IRS lifeexpectancy table; or

	(3)	have the TSP purchase a life annuity.

	Generally, the TSP provides funds only at retirement or death with no special provisionfor disability benefits.  The TSP allows for hardship withdrawals which are taxable, and may besubject to early withdrawal penalties.  A participant who receives a hardship withdrawal isprohibited from contributing to the TSP for six months.

	The TSP also has a mechanism for workers to borrow against future benefits.  Theborrower must be working at the time of repayment, because repayments are made throughpayroll allotments.  There are two types of loans: (1) general purpose loans from the worker'scontributions and earnings, with a repayment period of one to four years; and (2) residentialloans for the purchase of a principal residence, with a repayment period of one to fifteen years.

**Survivor, disability and spousal benefits**

Survivor and spousal benefits.--Generally, if the worker dies with an outstanding balancein his or her TSP account, the balance is distributed according to the most recent, validdesignation-of-beneficiary form.  If the individual was married at the time of death, the accountis generally paid to the surviving spouse unless the surviving spouse had previously agreed tohave a different beneficiary named.  If death occurs after the TSP has purchased an annuity,benefits are provided according to the annuity option selected.  TSP benefits are subject todivision upon divorce or separation.

Disability benefits.--The TSP does not provide additional benefits in the case of adisability.  However, disability is an event that allows participants to obtain distributions fromthe plan. 

Withdrawals.--If the TSP participant is married, then benefits will be paid in the form of ajoint and survivor annuity unless the participant and the participant's spouse consent to anotherform of payment.****

**Miscellaneous administrative issues**

	The Federal Retirement Thrift Investment Board administers the TSP and contracts witha separate organization to serve as a TSP record keeper.  Currently, the Board has an agreementwith the U.S. Department of Agriculture's Nation Finance Center ("NFC") to provide recordkeeping services for the TSP.  The NFC maintains the accounts of TSP participants andprocesses withdrawals, loans, interfund transfers, and participants designation of beneficiaries. The worker's employing agency distributes TSP materials and answers questions about the TSP.  

**Tax treatment of TSP**

	TSP contributions and earnings are subject to the same tax rules as section 401(k) plans.

**D.  Individual Retirement Arrangements ("IRAs")
**In general**

	An individual retirement arrangement ("IRA") is a tax-favored savings vehicle availableto individuals.(16)  Under present law, there are three different types of IRAs-deductible IRAs,Roth IRAs, and nondeductible IRAs-each of which are subject to somewhat different tax rules.  Contributions to a deductible IRA are deductible, earnings are not currently taxable, and amountswithdrawn from a deductible IRA are includible in income when withdrawn.  Contributions to anondeductible IRA are not deductible, earnings on amounts in a nondeductible IRA are notcurrently taxable, and amounts withdrawn from a nondeductible IRA are includible in income inthe year withdrawn to the extent attributable to earnings.  Contributions to a Roth IRA are notdeductible and earnings are not currently taxable.  If certain requirements are satisfied,distributions from a Roth IRA are not includible in income.

	Although the tax rules applicable to the various types of IRAs are different, theadministration of all types of IRAs is similar.  IRA assets are held by banks or similar financialinstitutions.  In general, the individual IRA owner is responsible for complying with the rulesapplicable to IRAs.

**Eligibility for participation**

        Deductible IRAs

	The ability to make deductible contributions to an IRA depends on the income of theindividual and whether or not the individual and his or her spouse is an active participant in anemployer-sponsored retirement plan.  

	If an individual (and his or her spouse, if any) is not an active participant in an employer-sponsored retirement plan, then the individual may make the maximum permitted IRAcontribution.  If the individual is not an active participant, but the individual's spouse is, then themaximum contribution is phased out between adjusted gross income ("AGI") of $150,000 to$160,000.

	If the individual is an active participant in an employer-sponsored retirement plan, thenthe maximum contribution is phased out between AGI of $51,000 to $61,000 (for 1999) formarried taxpayers filing a joint return and $31,000 to $41,000 (for 1999) for single taxpayers.(17)

        Roth IRAs

	The maximum annual contribution that can be made to a Roth IRA is phased out forsingle individuals with AGI between $95,000 and $110,000, and for married taxpayers filing ajoint return with AGI between $150,000 and $160,000.

        Nondeductible IRAs

There are no income limits on nondeductible IRAs; any individual with earned incomecan contribute to a nondeductible IRA.

**General benefit structure**

	An IRA is similar to a tax-qualified defined contribution plan.  That is, the amountpayable from an IRA is the account balance.  The individual bears the risk of investment losses.

**Funding and contributions**

	The maximum amount that can be contributed to all an individual's IRAs in a year is thelesser of $2,000 or the individual's earned income.  In the case of a married couple, acontribution of up to $2,000 can be made for each spouse as long as the couple has earnedincome of at least the contributed amount.

	Contributions to an IRA may be made until April 15th of the year following the year forwhich the contribution is being made.

	The individual making the contribution to an IRA must determine the maximumcontribution the individual is eligible to make.  

	In order to help enforce the $2,000 annual contribution limit, an IRA cannot accept acontribution (other than a contribution rolled over from another IRA or plan) in excess of $2,000. In addition, excess contributions are subject to an excise tax if not withdrawn from the IRA.  

**Investments**

	In general, IRAs can be invested in whatever investment vehicles the IRA provider makesavailable.  The individual IRA owner chooses the investments he or she wants to make.  Financial institutions generally charge fees relating to IRA maintenance and investment.

	IRAs may not invest in life insurance or collectibles.  In addition, IRA assets may not bepledged as security as a loan.  IRAs are also subject to the same prohibited transaction rulesapplicable to qualified plans.  Thus, IRA assets generally cannot be invested in a transaction inwhich the IRA owner has an interest.  For example, IRA funds could not be used to make thedown payment on a home in which the owner was living.

**Distributions**

        Timing of distributions

	The minimum distribution rules generally apply to IRAs (other than Roth IRAs).  Thus,distributions from an IRA must begin at age 70-1/2.  Post-death minimum distribution rulesapply to all IRAs, including Roth IRAs.

	There are no distribution restrictions applicable to IRAs.  Thus, amounts can bewithdrawn from an IRA at any time.  However, early distributions are subject to the 10-percentearly withdrawal tax, unless an exception applies  In addition, the tax consequences of awithdrawal from a Roth IRA may be affected if a distribution is made before the requirementsfor tax-free withdrawal have been satisfied.

        Form of distributions

	Subject to the minimum distribution rules, individuals may withdraw funds over any timeperiod they desire.  If an individual wishes to annuitize benefits, they could use an IRA assets topurchase an annuity.(18)

        Taxation of distributions

	Distributions from a deductible IRA are fully includible in income.  Distributions fromnondeductible IRA are includible in income to the extent attributable to earnings.  In general,each distribution from a nondeductible IRA is treated in part as a return of contributions and inpart as taxable earnings.  

	Distributions from a Roth IRA are tax free if certain requirements are satisfied.  If adistribution from a Roth IRA is taxable, then only the amount of the distribution attributable toearnings is includible from income.  In general, distributions from Roth IRAs are treated ascoming first from contributions.

	Taxable distributions from an IRA prior to age 59-1/2 are subject to an additional 10-percent early withdrawal tax.  Exceptions to the tax apply to certain periodic distributions,distributions for medical expenses in excess of 7.5 percent of adjusted gross income,distributions for health insurance expenses of unemployed individuals, education expenses, andfirst-time homebuyer expenses.

**Survivor, disability, and spousal benefits**

	IRA owners can designate a beneficiary or beneficiaries that will be entitled to receive theremaining interest in the IRA upon the death of the IRA owner.  If the beneficiary is thesurviving spouse, he or she can treat the IRA as his or her own.  

	IRAs are not subject to the spousal rules applicable to qualified plans.  Thus, the IRAowner may name whoever he or she chooses as the beneficiary.  

	IRAs are subject to division upon divorce or separation.

**Enforcement**

	The instrument creating an IRA is required to include certain of the rules applicable toIRAs.  In addition, the financial institution responsible for the IRA is subject to certain reportingrequirements.

	In general, however, the individual IRA owner is responsible for making sure thatcontributions to an IRA are made in accordance with the applicable rules and that the tax rulesare applied appropriately.  An individual who is audited may be required to demonstrate that heror she was in fact entitled to the tax treatment claimed with respect to the IRA, e.g., that a IRAdeduction was properly taken or that a distribution was not subject to the early withdrawal taxbecause of applicable of an exception to the tax.

**III.  DESIGN AND IMPLEMENTATION ISSUES RELATING									TO INDIVIDUAL ACCOUNTS
**A.  Overview of Individual Accounts**

	The current interest in a new system of individual private savings accounts owes it origin,at least in part, to the long-term funding issues of the current Social Security system.  Individualprivate accounts ("IPAs") could be used to improve the long-term financial status of the SocialSecurity system by providing an alternative to the current method of funding Social Securitybenefits.  This would be accomplished by coordinating the benefits an individual receives underSocial Security with the amounts accumulated in the individual's IPA.  IPAs could also be usedas a means to increase the retirement savings of individuals generally (without coordinating withSocial Security), which could reduce reliance of individuals on the Social Security system as aprimary source of retirement income.  This reduced reliance on the Social Security system wouldtake some pressure off of the system and reduce the relevance of the long-term financialproblems of the system.  However, under this approach, other changes to Social Security benefitsor funding would be needed to impact the financial status of the Social Security system. 

	Certain fundamental structural issues must be addressed in the development of an IPAsystem.  These issues include the following:

	(1)	Is the IPA system intended as an independent add-on to the Social Security system orit is intended to partially or fully replace the Social Security system?

	(2)	Is participation in a system of IPAs voluntary or mandatory?

	(3)	Is participation in a system of IPAs limited to wage earners or are all individuals (orall taxpayers) entitled or required to participate?

Decisions with respect to these issues have significant policy and administrative implications. Because such decisions will likely be made in the context of a broader review of the SocialSecurity system, the issues surrounding such decisions generally are not specifically addressed inthe analysis that follows.  For purposes of the discussion in this document, it is generallyassumed that any new IPA system will have certain features in common with Social Security; inparticular, it is assumed that the system will include mandatory contributions and that the systemwill be limited to workers. It is also generally assumed that IPAs will be coordinated formallywith Social Security benefits, e.g., through a reduction in otherwise payable Social Securitybenefits.

	A fundamental issue that must be addressed in deciding how to implement any IPAproposal is who will be primarily responsible for administration of the IPAs.  Present lawprovides three basic models for IPA administration: (1) a system of accounts held andadministered by the Federal Government, which would place most of the administrativeresponsibility of IPAs on the Federal Government; (2) a system of accounts based on the currentsystem of employer-sponsored section 401(k) plans, which would place more responsibility onemployers; and (3) a system of accounts based on present-law IRAs, which would place moreresponsibility on individuals and financial institutions.  Regardless of which basic model ischosen, any IPA proposal is likely to require significant involvement of the Federal Government,and, potentially, of employers, individuals, financial institutions, and a variety of serviceproviders.

	Implementation of any IPA proposal also raises a number of other administrative issues.These issues are discussed in detail below.

**B.  Funding Sources and Allocation of Administrative Costs**

**Funding sources**

	Contributions to IPAs could be funded in a variety of different ways.  A number ofproposals contemplate that IPAs will be funded from the current projected budget surpluses.  Inaddition, contributions could be funded through a portion of the current payroll tax or throughnew taxes.  Some proposals describe a funding mechanism whereby individuals would be givenwhat is called a "tax credit," but the amount of the credit would have to be contributed to an IPA. While the descriptions of these various funding sources differ, they may have similar economicimplications.  The economic effects of IPA funding are discussed in Part IV.B.3., below.

**Allocation of administrative costs**

	The creation and administration of IPAs will generate a variety of administrative costs. These include costs involved in the initial design of the program, start-up expenses (e.g.,modifications to existing systems or creation of new systems to collect contributions), ongoingoperational expenses (such as expenses for processing distributions, providing notices toemployees, employee education, and record keeping), and investment-related expenses.  Decisions about design features and how to implement an IPA proposal can impact the level ofadministrative costs associated with the proposal.  

	Policy makers will need to decide who will bear the burden of administrative expenses. The experience under employer-sponsored retirement plans may provide some guidance.  Undersuch plans, some expenses, such as those associated with plan design and start up, are typicallypaid for by the employer.  Other expenses may be paid out of plan assets and allocated among allplan participants or allocated to certain plan participants.  For example, the costs of changinginvestments may in some cases be allocated to participants who make such changes.

	Similarly, under an IPA proposal, different sorts of administrative costs could be paid indifferent ways.  For example, certain costs could be paid out of general revenues.  Some costscould be allocated among all IPA holders as a charge against all account earnings; in other cases,it may be appropriate to charge fees only to particular individuals, such as individuals makingcertain investment decisions.

	Allocating administrative expenses to IPA participants could affect IPA accumulations. For example, one study found that 58 percent of all workers covered by Social Security in 1996had taxable earnings of less than $20,000.(19)  An annual contribution equal to two percent ofcompensation (as a number of proposals contemplate) would provide each of these workers witha maximum annual contribution of $400.  Some have expressed concern that allocation ofadministrative expenses to account with relatively low balances could significantly erode anyearnings.      

	  Any IPA proposal that contemplates involvement of employers and others (e.g.,financial institutions) presents the issue of whether employers or others who incur significantcosts as a result of an IPA proposal are reimbursed for those costs in some way.  If, for example,a financial institution is not reimbursed for its costs relating to an IPA proposal, then thefinancial institution will likely pass those costs through to its customers.  This may include IPAaccount holders, if the IPA proposal permits the costs to be passed through, or other customers ofthe financial institution.  Similarly, if the employer plan model for account administration isadopted, employers will likely pass the costs of IPA administration along to the customers of theemployer, if the employer is not reimbursed for the expenses or permitted to allocate theexpenses to IPA participants.

**C.  Administrative Issues Relating to Investments**

**General discussion**

	There are a variety of different ways in which funds in IPAs could be invested.  Theseoptions generally mirror those used today under private pension plans.  These options include:(1) investment by professional money managers, much like pension plan fiduciaries makeinvestment decisions with respect to qualified pension plan investments; (2) some level ofindividual investment direction; and (3) statutorily mandated investments.  Under (2), there areadditional options.  Individuals could be given a very broad choice of investments, or morelimited options representing various degrees of risk and possible returns, such as those offeredunder the Federal Thrift Savings Plan and most private-sector section 401(k) plans.  Acombination of the various models could also be provided.  For example, individuals could begiven the opportunity to direct the investment of a portion of their IPA account balance, and therest of the funds could be invested pursuant to investment decisions made by professional moneymanagers.  As another example, investments could be made by professional money managers,but the statute could include parameters regarding permitted investments. 

	The decision as to how investments will be made raises significant policy issues, whichare discussed below in Part IV.B.4.  

	From an administrative perspective, any of the investment methods could beimplemented under any of the three basic IPA models.  For example, individuals could be givesome investment discretion under a system of government-managed IPA accounts.  Similarly,under the IRA-type model, the options available could be limited to funds meeting certainstatutorily defined requirements.  As a practical matter, however, if IPAs follow the individually-managed model and if investments are restricted, it is possible that some individuals willmistakenly invest IPA funds in prohibited investments.

	Under any of the alternative approaches to making investments, consideration should begiven as to what, if any, liability those making investment decisions have in the event improperor inappropriate decisions are made.  That is, it needs to be decided whether some form offiduciary liability should be imposed.

**Participant-directed investments**

	If individuals are given some investment discretion, then individuals will need to beprovided with informational materials regarding the various investment options.  Because manyindividuals do not have investment expertise, educational information regarding investments mayalso need to be provided to help ensure that individuals make appropriate investment decisions. In some cases, the financial institution or other entity offering the investment may be relied uponto provide information regarding the investment and educational information, just as they do nowwith respect to IRAs and employer plan investment options.  For example, employer plan moneymanagers currently often provide seminars regarding investment strategies to plan participants. If the financial institution does not provide sufficient information, then the government oremployers may need to provide additional information.  The more individual investmentdiscretion that is provided, the greater is the potential need for investment education.

	If individual investment discretion is permitted, rules will also be needed regarding howoften investments can be changed.  A default investment may also be needed in the event that anindividual does not make an investment election.

	Other issues that arise if individuals are allowed to make investment decisions are howinvestment elections will be made and how funds will be transferred to the investments picked bythe individuals. Because resolution of these issues depends in part on how IPAs are funded andhow contributions are collected, these issues are discussed in below in Part III.D. (Administrative Issues Relating to Contributions).

**D.  Administrative Issues Relating to Contributions**

**In general**

	Any legislation creating a new system of IPAs will need to address a variety ofadministrative issues relating to contributions, including the following: (1) methods forcollecting contributions; (2) crediting of contributions to IPAs; and (3) if participants arepermitted to direct investments, transfer of funds to investment vehicles elected by participants. The need to have a contribution collection system depends in part on the method used to fundIPAs.  For example, if IPAs are funded solely from budget surpluses or general revenues, then aspecific collection mechanism for IPA contributions would not be necessary.  Many IPAproposals, however, contemplate individual contributions.  Resolution of the issues relating tocontributions also depends in part on the IPA model adopted (i.e., government-held accounts,employer-sponsored plans, or individual accounts).

**Government held accounts**

        Collection of contributions

	If the government held account model is adopted, then the Federal Government would beresponsible for collection of contributions, allocation of contributions to IPAs, and transfer offunds to investment managers.  Under this model, a means of collecting contributions andtransferring the contributions to the Federal Government would be needed.  As discussed below,mechanisms exist under the present-law Federal tax system that could be used by the FederalGovernment to collect IPA contributions.  New systems could also be developed.

	One method that could be used to collect IPA contributions is the present-law payroll taxsystem.  Under this approach, contributions would be withheld from employees and paid over byemployers.  Contributions for self-employed individuals would be collected in

the same manner as self-employment taxes under present law, i.e., through the estimated taxsystem.  Utilizing the present-law payroll tax system would have the advantage that the system isalready in place and is familiar to workers and employers.  The ease with which the currentsystem could be used may depend on how similar the IPA system is to the current SocialSecurity system.  For example, if IPA eligibility is significantly different from Social Securitycoverage, then present-law payroll systems would need to be adapted for IPA purposes. Similarly, collection of contributions using the current system would be easier if thecontributions are based on a percentage of wages as defined for Social Security purposes.   Ifthere are differences between the tax bases for IPA and Social Security purposes, then employerwithholding systems would be to be modified, and self-employed individuals would need tomake additional calculations in computing their taxes that are not required under present law. 

	One possible alternative to utilizing the payroll tax system to collect IPA contributionswould be to use the income tax system.  Under this approach, the amount of the contributionscould be considered an additional tax, subject to withholding and estimated tax rules.  Additionalforms and worksheets would be required to enable individuals to calculate the amount of thecontribution.  Compared to using the payroll tax system, this approach would place more burdenson individual workers.  It could also delay the time at which contributions are collected.  Another issue is that many workers who may be covered by the IPA program may not currentlyfile income taxes.  Thus, such individuals might be required to file solely because of the IPAprogram.

	Another approach would be to utilize the income tax system, but not apply withholdingand estimated tax rules.  This approach would further delay the timing of contributions, andcould raise significant enforcement issues.

        Allocation of contributions to individual accounts

	Assuming contributions are based on wages or self-employment earnings, then creditingof contributions to accounts would require accurate wage and earnings information.(20)  Themethod used by the Federal Government under present law to credit wages and earnings forSocial Security purposes could be used to credit contributions to IPAs.  Under present law,employers are generally required to provide wage information (Forms W-2) to the SocialSecurity Administration ("SSA") by the end of the February of the year following the year forwhich the wage information is provided.  It generally takes some time before the wageinformation is credited to each employee's account.  Crediting earnings with respect to self-employed individuals takes somewhat longer than crediting of information for employees.(21)  Thissystem could be used to determine the amount of wages and earnings, and therefore the amountof contributions, to be allocated to each individual IPA.  The Federal Government could thentransfer the correct amount of contributions to each IPA.(22)

	Some have expressed concern that using the present-law method of crediting earningsunder Social Security to allocate contributions to IPAs will mean that contributions for a yearwill not be allocated until well after the end of the year, with the result that investment of IPAcontributions may be delayed.  One way to address this concern would be to credit contributionswith earnings for some period before contributions are allocated to accounts.(23)  Earnings could becredited based on a statutorily prescribed rate of return, or with actual investment returns--contributions could be invested even though there has not been a reconciliation to particularaccounts.

	Another approach would be to require the Federal Government to credit wages toindividuals more frequently than is done under present law.  Such a requirement would imposeadditional administrative burdens on employers, the Federal Government, and individuals thatwould not be imposed in the absence of the IPA proposal.  For example, in order to reconcilewage information more frequently than annually, employers would have to report suchinformation more frequently to SSA, self-employed individuals would have to provide earningsinformation more frequently, and SSA would have to process this information more often thanunder present law.(24)

        Transfer of contributions to investment vehicles

	If individuals are permitted some investment discretion, then there will need to be amechanism for making investment elections and for transferring funds to investment vehicles.  Ifthe Federal Government is responsible for administering investment elections, one method ofmaking investment elections would be for individuals to file a form with their employer, whowould forward the form to the government, much like wage withholding forms are completed bythe worker and filed by the worker's employer.  A separate system would need to be adopted forself-employed individuals.  Alternatively, the individual could provide investment information as

part of the individual's tax return.  A working model for such a system is the recently adopted taxrefund direct deposit option.  A taxpayer can direct that his or her refund be directly deposited inhis or her account by providing the routing number for the financial institution and the taxpayer'saccount number on the tax return.  In 1998 (for taxable year 1997) approximately $34 billion ofrefunds were directly deposited for approximately 19 million taxpayers.  This number is a smallfraction of workers covered by Social Security (and of individuals who would likely be coveredby an IPA proposal); however, the system provides a model that could possibly be expanded.

**Employer-sponsored plan model**

	Under the employer-sponsored plan model, employers could be required to collectcontributions from employees who are covered under the IPA system and to allocate eachemployee's contributions to the employee's IPA.  Employers that have section 401(k) plans willalready have systems in place which could be used to collect and transfer IPA contributions.However,  many employers, particularly smaller and medium-sized employers, do not have suchplans and would need to adopt systems to remit and transfer IPA contributions.  Such a proposalmay also increase administrative costs for employers that already have section 401(k) plans.  Forexample, some employees that are not covered by the employer's plan or that are notparticipating in the employer's plan may have IPAs.  Thus, the employer may be required toadminister contributions for additional employees.  In addition, to the extent that the contributionbase for the IPA system is different than that used under the employer's plan (e.g., the definitionof compensation is different), the employer's existing systems would need to be modified. 

	Under the employer-sponsored plan approach, employees would make investmentelections (if permitted under the proposal) through their employer.  As discussed above, whileemployers with section 401(k) plans typically perform this function currently, requiringemployers to do so as part of an IPA proposal will impose additional administrative burdens onemployers.  For example, employers that already have section 401(k) plans may have to adaptexisting systems if the investment options available under the IPA proposal differ from thoseoffered under the employer's plan.

	Rules would be necessary to ensure that an employer (1) allocates an employee'scontributions within a specified time period and (2) credits the employee's account with incomefor any period during which such contributions are not allocated.  It may be necessary to requirean employer to submit information to the Federal Government to verify that the appropriatecontributions and investments have been made on behalf of employees.

	Under the employer plan model, a separate system would be needed to collect, remit, andallocate contributions for self-employed individuals.

**Individual accounts**

	Under an individual account system, either individuals could be required to makecontributions to an individual account or the Federal Government could collect contributions(such as through the present-law payroll tax system) and remit such contributions to a financialinstitution designated by the individual or established by the Federal Government.

	If individuals are required to make the contributions directly, then reporting requirementswould be needed to guarantee that contributions are made in the correct amount and on a timelybasis.  Rules enforcing the contribution requirements might also need to be developed.

	If the Federal Government collects the contributions and remits them to a financialinstitution, rules would be necessary to ensure that the financial institution (1) allocatescontributions to an individual's account within a specified period of time and (2) credits theaccount with earnings for any period during which such contributions are not allocated.  It maybe necessary to require the financial institution to submit information to the Federal Governmentto verify that the appropriate contributions have been made on behalf of such individuals.

**E.  Distributions From Individual Accounts
**1.  Access to funds prior to retirement**

**General discussion**

	Precluding access to funds in IPAs is necessary to ensure that the accounts are not erodedthrough use of the funds for nonretirement purposes.  Prohibitions on early access to funds willalso be of importance if the private accounts are coordinated with Social Security, e.g., if some orall of the account balance reduces the amount otherwise payable under Social Security.  Withoutrestrictions on preretirement withdrawals, individuals would simply withdraw funds beforeretirement in order to minimize the reduction of Social Security benefits.(25)

	As a practical matter, it may be difficult to restrict access to private accounts.  Pressuresunder present law have resulted in numerous exceptions to the 10-percent early withdrawal taxfor IRA and, in some cases, qualified plan distributions.  For example, the 10-percent earlywithdrawal tax does not apply to IRA withdrawals for education, medical, and first-timehomebuyer expenses.  In addition, many employer-sponsored retirement plans permit individualsto borrow from their retirement accounts.(26)

	The ability to maintain withdrawal restrictions may depend in part on how individualsview the private accounts. If they are viewed as part of Social Security or as a pension benefit,then they may be more willing to not have access to funds prior to retirement, as that isconsistent with the way in which Social Security works today (as well as private defined benefitpension plans).  On the other hand, if individuals view private accounts more as personal savings,or as supplements to other retirement income, they may be more opposed to restrictions onpreretirement access to funds.  

	To the extent that preretirement access is prohibited, this prohibition should extend toloans based on the account balance as well as outright distributions.  While theoretically anindividual will repay the loan, a loan program may simply result in reduction of retirementbenefits if the loan is not repaid.

**Access to funds for disability**

A separate issue is the extent to which IPA balances will be paid prior to retirement onaccount of a participant's disability.  If either the IPA account balance or an annuity based onsuch balance can be paid on account of disability, then special rules will be necessary.

	These rules must define what constitutes a disability for which payments are permittedand specify the mechanism by which the IPA administrator verifies that (1) there is a validdisability and (2) such disability continues for the period during which payments are made.****

**Issues associated with particular types of accounts**

Government held accounts.--If private accounts are held and administered by the FederalGovernment, withdrawal restrictions and disability provisions will be relatively easy to enforce,as the funds simply will not be made available until the individual is entitled to a distribution.

Employer-sponsored plans.--Withdrawal restrictions could be enforced under anemployer plan approach just as they are under present law with respect to certain types ofqualified plans.

	If withdrawals are allowed in the case of disability, then additional rules may benecessary.  If there is a certification required before disability benefits are paid, it may benecessary to have the IPA participant provide adequate verification to the Federal Government,which would then direct the employer to commence disability payments.  Alternatively, theparticipant could be required to provide adequate verification of disability to the employeradministering the plan and the employer could be required to submit such verification to theFederal Government.

	Issues may arise with respect to the treatment of funds once an employee has terminatedemployment with the employer.  Under present law, employers often do not wish to maintainaccounts for individuals who are no longer connected to the employer.  Maintaining suchaccounts can create administrative difficulties for the employer, for example, the employer mayhave difficulty locating the former employee in order to send required notices or even to makebenefit payments.  Thus, if the employer plan model is followed, it may be desirable to considerallowing the employer to transfer the funds elsewhere (e.g., to another employer plan, to a privateaccount, or to a government held account) once an employee has separated from service.

Individual accounts.--Financial institutions are generally required to make funds availableto depositors, so that some changes to the rules governing such institutions may be needed toprevent early access to funds held in individual accounts with private institutions.  

	Tax penalties can be imposed to make it unattractive to individuals to access the fundsbefore retirement, similar to the present-law 10-percent early withdrawal tax applicable to IRAsand tax-qualified retirement plans.  However, a much higher penalty tax than 10-percent wouldlikely be necessary to prove a true disincentive to withdraw funds early, particularly given anysubsequent interaction with Social Security benefits.

	Administration of payments on account of participant disability will be much moredifficult in the case of individual accounts.  A mechanism will be required to ensure that thedisability is verified.  This could be accomplished by requiring the participant to submitappropriate documentation to the Federal Government, which would then direct the financialinstitution to make payments to the participant or to purchase a disability annuity.

**2.  Portability of account balances**

**General discussion**

	Under present law, Social Security benefits are portable-benefits and contributions arenot dependent on working for a particular employer-and each worker has a single "account"within Social Security to which earnings and quarters of coverage are credited.  Employer-sponsored retirement plans also offer some measure of portability-nonannuity distributions cangenerally be rolled over tax free to another employer retirement plan (if the plan accepts suchrollovers) or to an IRA.  Providing portability of new IPAs would enable individuals to maintaina single account with all their IPA accumulations.  Maintaining a single account will generallyminimize administrative issues for individuals.  In addition, maintaining a single account foreach individual will make coordination with Social Security easier.  If an individual has morethan one account, then all account balances will have to be combined in order to properlycoordinate with Social Security benefits.  This could create difficulties if individuals have severalaccounts (particularly if the individual did not maintain adequate records regarding his or heraccounts).

**Issues associated with particular types of accounts**

****Government held accounts.-If private accounts are administered by the FederalGovernment, then each worker will have a single IPA to which contributions are made (andearnings credited) regardless of the particular employer for whom the individual works.

Employer-sponsored plans.-Under the employer plan model, individuals could have morethan one IPA if the individual works for more than one employer.  Portability could be achievedby providing that accounts held by one employer are transferred directly to another IPA accountheld by the individual or the Federal Government upon separation from service with theemployer.  Employers will likely prefer that such transfers occur; under the current employer-plan system, employers can encounter difficulties keeping track of accounts for individuals whohave no current connection with the employer.  Among the problems that employers canencounter is that the former employee does not inform the employer of address changes.

Individual accounts.-If IPAs follow the IRA model, then an individual's account wouldnot be dependent upon the employer.  However, if individuals are to have only one IPA account,then changes in the law may need to be made so that an individual cannot set up more than oneIPA.  Even if individuals are by law precluded from maintaining more than one IPA, there maybe instances in which individuals inadvertently set up more than one account.  Rules would beneeded to address such situations.  

**3.  Form of distributions**

**General discussion**

	One issue that will need to be addressed under any private account system is whatdistribution forms are required to or may be made available.  If the private accounts are tooperate in a manner similar to Social Security, then an annuity would need to be made available. This would require the purchase of an annuity contact with the account funds.  An annuity maybe a valuable form of benefit, because it ensures a stream of payments throughout an individual'slife time.  Payments over the life expectancy of the individual may approximate an annuity;however, in some cases the individual will outlive his or her life expectancy.  It may also beeasier to coordinate private account benefits with Social Security if the same form of benefitpayment is available.

	Whether optional forms of benefit may be offered will also need to be addressed underany private account system.  Some optional forms may not be consistent with goals of providingretirement income security. For example, if payments can be made in a lump sum, there may bemore of a risk that individuals will not have sufficient retirement income throughout his or herretirement.  Permitting individuals to choose among various different types of distributionoptions may create administrative difficulties.  Some limits on the choices available as well asthe ability to change the form of distribution once distributions have begun may be helpful toreduce administrative burdens.

	See, also, the issues relating to spousal and survivor benefits in Part III. F., below, for adiscussion of issues (including spousal consent to benefit payment) relating to spousal rights.

**Issues associated with particular types of accounts**

Government held accounts.-Under a system that utilizes government accounts,distributions options can be easily limited.  If individuals are permitted to choose among morethan one distribution option, then mechanisms for communicating the choices to individuals, andfor individuals to make elections, will need to be created.

Employer-sponsored plans.--Forms of distribution could be limited under the employer-sponsored plan approach by permitting only certain forms of benefits to be made available. Under present law, many plans provide optional forms of benefit, with some restrictions as to theoptions available and the ability to change between options.

Individual accounts.-The same issues described above with respect to timing ofdistributions if distribution options are to be limited.  Thus, either the laws relating to banks andother institutions that currently hold IRA assets will need to be changed, or a tax penalty mayneed to be imposed to enforce any restrictions on the form of distributions.

	If forms of distribution are not to be restricted, then the administrative difficulties arisingwith respect to electing and changing distribution forms will not be as great under an individualaccount approach; the individual can simply take withdrawals from the account as needed.

**4.  Coordination with Social Security**

	It is anticipated that IPA balances may, in some way, be coordinated with Social Security. Such coordination could take a variety of forms.  For example, IPA funds could reduce SocialSecurity benefits on a dollar for dollar basis.  Alternatively, some portion of IPA funds couldoffset Social Security benefits, and some portion of IPA funds could be retained by theindividual.  Coordination of IPA balances with Social Security raises a number of issues. Specific issues will depend on the precise coordination mechanism used; however, some generalissues are discussed below.

**Vesting**

	One issue raised by coordination with Social Security is the extent to which individualshave a vested right to their account balances.  Under present law relating to qualified retirementplans, an individual is considered to be vested in retirement benefits if they have a nonforfeitableright to receive the benefits either currently or at some point in the future.  Under employer-sponsored retirement plans, if an individual is vested in his or her benefits, then the individualhas a right to receive the entire account balance.  If the individual dies before receiving his or herentire interest in the plan, then the remaining interest is paid to the individual's beneficiary.  Ifthe individual uses the account balance to purchase an annuity, then any death benefit payabledepends on the terms of the annuity purchased by the individual.

	If some portion of IPA balances are used to pay benefits that would otherwise be payableunder Social Security, then the individual may be said to have a vested right only to the extentthat the IPA balance is not used to pay Social Security benefits.  That is, the amount used to paySocial Security is in essence "forfeited."  If instead of reducing IPA balances, Social Securitybenefits are reduced by some portion of the IPA balance, then the individual could be said tohave a vested right to his or her IPA balance.  However, the economic effect on the individualwould be the same-in either case the IPA balance has been used as a method of prefundingSocial Security benefits.  The economic effects of coordinating IPAs with Social Security isdiscussed in detail in section Part IV. B.3., below.

**Benefit guarantee**

	Social Security currently provides a guaranteed benefit.  Policy makers will have todecide whether some minimum level of benefit will be guaranteed, or whether Social Securitybenefits will be based solely on IPA balances.  If there is no benefit guarantee, then theindividual will bear the risk of loss or poor investment returns on IPA balances.   If there is aguaranteed minimum benefit (e.g., the present-law level of Social Security benefits), then theindividual bears the risk of invest loss or poor returns with respect to the extent of potentialbenefits in excess of the minimum benefit.  While providing a guarantee may help ensureadequate retirement income security, it may also affect investment choices.

	In addition to investment risks, IPA balances could be reduced to the extent there is fraudor other types of mismanagement.  For example, in some cases employers may not forwardcontributions required to be allocated to an individual's account.  In addition, funds could beembezzled or stolen from investment funds.  Such issues would need to be addressed, whetherthrough some Federal guarantee or private insurance against theft.

**Administrative issues associated with Social Security coordination**

	Regardless of the particular way in which IPAs are coordinated with Social Security,calculations will be need to be performed in order to determine the proper amount of the offset. The calculations could be performed by a government agency, individuals, or financialinstitutions holding IPAs.  In general, there is likely to be more consistency in making anycalculations if they are performed by a single source.  If IPAs are held by private financialinstitutions, then such institutions may need to report IPA account balances and activity to theFederal Government to help ensure that any offset with Social Security is correctly calculated. Consideration will need to be given as to whether annuitization of the IPA balance is necessaryto properly coordinate with Social Security.

	The time at which any offset is made will also be an issue.  It may be easier to fix theaccount balance at a specified date, e.g., when retirement distributions begin, in order tominimize the number of calculations that need to be made.  The account balance will change overtime as distributions are made; additional investment earnings and losses may be credited to theaccount, and additional contributions may be made if the individual is still working.  However,using a specified date could change individuals' investment decisions.  For example, if additionsto the IPA balance after retirement do not reduce Social Security (i.e., the individual retains anyadditions to the IPA after reaching retirement age), then the individual may make moreconservative investment decisions after reaching retirement age than before, because theindividual will directly receive the benefit of any investment gains.(27)

**5.  Administrative issues with respect to taxation of distributions**(28)

	In general, the administrative issues that arise with respect to taxation of distributions aresimilar regardless of the kind of account established.  Because the individual has the burden ofproperly computing and reporting taxable income, it is likely that the individual will bear theadministrative burdens associated with any system of IPA taxation.  While record keeping andreporting requirements can be imposed on institutions that maintain the IPA to assist individualsin computing the amount of taxable income due to IPA withdrawals, in general, the morecomplicated the tax rules associated with IPAs, the greater the burden will be on individuals.  

	The fewest administrative issues arise if distributions from private accounts are either (1)fully includible in income, or (2) fully excludable from income.  If distributions from theaccounts are taxable, then information reporting regarding distributions, as is currently done withrespect to IRAs and employer-sponsored plans, may be desirable.  If distributions are taxable (inwhole or in part) then whether to adopt a withholding system should be considered.  Underpresent law, there is optional withholding with respect to IRAs and employer-sponsoredretirement plans.

	Additional administrative issues arise if the account consists in part of amounts that willbe taxable upon distribution and in part of amounts that will not be taxable upon distribution. For example, if the accounts were taxed like present-law nondeductible IRAs, then the amountrepresenting after-tax contributions would not be taxed upon distribution, but earnings oncontributions would be.  The difficulty that arises under such an approach stems from the need tokeep track of contributions.  The present-law analogies (i.e., nondeductible IRAs and after-taxcontributions to employer plans) may not provide a very good guide, as it is generallyacknowledged that record keeping regarding contributions can be difficult, and is generally theresponsibility of the individual.   In addition, ordering rules would need to be developed todetermine what portion of a distribution, if any, was taxable.  Similar rules under present law canbe difficult to apply.

	Another method of taxing distributions would be to follow the present-law SocialSecurity system, under which the amount includible in income is based upon the individual'smodified adjusted gross income.  If such an approach were adopted with respect to the accounts,then the burden of determining the taxable amount would fall on the individual, as under presentlaw.  The difficulty of determining the taxable amount would depend on the particular ruleadopted.

	Other issues may arise due to the coordination of IPAs with Social Security.  Forexample, some proposals have suggested that the amount of the IPA that reduces Social Securitybenefits should receive different tax treatment than the amount of the IPA balance that is notintegrated with Social Security.  For example, suppose an individual has an IPA balance of $100,and that under the proposal one-half of IPA balances reduce Social Security benefits.  If theindividual withdraws the $100, then his Social Security benefits are reduced by $50.  Onepossible approach would be to tax the $50 that reduces Social Security benefits in the samemanner that Social Security benefits are taxed and to apply a different rule to the remaining $50. Any rule that provides different tax treatment for different portions of the account would raiseadditional administrative issues.

	If IPA balances are fully or partially taxable, then consideration should also be given as towhether withholding is required or permitted (e.g., IRA distributions are subject to voluntarywithholding under present law).

**6.  Miscellaneous distribution issues**

	A variety of other distribution issues would need to be addressed under any proposal tocreate private accounts, including whether the accounts are protected from the individual'screditors; whether, if funds are not held by the government, accounts can be transferred fromemployer to employer or to some to other type of arrangement; and whether an individual canchange financial institutions or investment managers without receiving a distribution.

**F.  Survivor and Spousal Rights**

**In general**

	Any individual private account proposal should specify whether the account of a worker is subject to State community property laws or is otherwise subject to assignment or alienation. A decision could be made to let State laws control or, alternatively, a separate Federal systemcould be established to override the applicability of State law to the balances in the individualprivate account.  A system similar to the rules applicable to qualified retirement plans could beadopted in which the amounts in an individual private account generally are not subject toassignment or alienation, but specified rights are provided for current and former spouses of planparticipants.

	The present-law social security system and the present-law qualified retirement plansystem recognize the rights of certain survivors of a deceased worker and certain divorcedspouses.  A variety of issues relating to survivor and spousal rights are raised by the creation ofprivate accounts.  The work and earnings characteristics of women relative to men may affect therelative changes in benefits if a private account proposal is enacted.  Thus, in designing a privateaccount proposal, careful consideration will be required of the extent to which an individualother than a worker has a right to the assets accumulated in the worker's account.

	The first issue that must be addressed is whether a spouse of a worker acquires rights tothe amounts accumulated in the worker's account.(29)  Some private account proposals do notacknowledge the rights of former and surviving spouses to the amounts accumulated in aworker's account.  Some people will argue that it is necessary to recognize the rights of a spouseof a worker so that spouses who elect to work inside the home will not be at a disadvantagerelative to other spouses who work outside the home.  Such individuals will also cite the fact thatwomen, on average, have lower income during retirement than men as further support for theneed to provide former and surviving spouses with a right to assets in a worker's private account.

	If it is determined that a former or surviving spouse will be given rights to the worker'saccount, then the nature of the rights of such spouses must be defined.  Some of the possibleoptions are the following:

- The nonworker spouse could be entitled to contributions to his or her own accountin an amount equal to one-half of the contributions made by the worker spouseduring any year in which the couple is married.
- 	The nonworker spouse could have a right to one-half of the amounts accumulatedin the worker's own account, without regard to when such contributions weremade.
- 	The nonworker spouse could have a right to one-half of the contributions (andallocable earnings) made by the worker spouse during the years in which thecouple is married.
- The nonworker spouse could have a right to amounts in the worker's account onlyif the nonworker does not have an account in his or her own name (of if thenonworker does not have an account with a minimum account balance).
- 	The nonworker spouse could be required to approve any designation of abeneficiary of the account that is not the nonworker spouse.
- 	The nonworker spouse's consent could be required with respect to anydistributions from the account that are permitted prior to the worker attainingretirement age.

	Under any of the options described above, it would be necessary to specify when therights of the nonworker spouse become nonforfeitable (e.g., upon death of the working spouse,upon the working spouse attaining a specified age, etc.).  In addition, if it is assumed that aspouse acquires certain rights relating to a worker's account, but does not have the right to thecreation of a separate account for such spouse, then the issues described below must beaddressed.

**Spousal and survivor rights upon death before retirement**

	The initial decision that must be made is whether a worker has a vested right to benefitsaccumulated in his or her account prior to attaining retirement age.  If the amounts accumulatedin a worker's account are fully nonforfeitable (i.e., if either the worker or the worker'sbeneficiaries are entitled to receive them even if the worker dies prior to retirement age), then itis necessary to determine whether a surviving spouse of a worker is entitled to the amountsaccumulated in the worker's account at death prior to retirement age or whether the distributionof amounts accumulated in the account is governed by the worker's beneficiary designation.  Inaddition, it will be necessary to determine whether the worker's spouse is given a priority right tothe amounts accumulated in the account such that the spouse is required to consent to anybeneficiary designation that is not such spouse.

	It may be possible to design a system that is similar to the present-law social securitysystem in which the rights of survivors are determined by reference to the worker's accountbalance and the characteristics of the survivors.  Under such a system, the amount paid to thesurvivors may be limited to a portion of the worker's account balance and only for a limitedperiod of time (e.g., until a minor child attains age 16).  Under this type of system, the amountsaccumulated in the worker's account are only nonforfeitable to the extent the worker hassurvivors who meet certain criteria and, therefore, would be entitled to receive a portion of theworker's account balance.  The portion of the worker's account that is not paid to such survivorswould then be forfeited.

**Spousal rights upon retirement age**

	When a worker attains retirement age, it is necessary to specify whether the worker'sspouse has the right to consent to any optional form of benefit payment that does not provide ajoint and survivor annuity for the worker and spouse.

**Spousal rights upon divorce**

	A separate issue that must be addressed is whether a nonworker spouse acquires or retainsrights to the amounts accumulated in a worker's account upon divorce of the couple.  If thenonworker spouse either has a stated legal right (e.g., under State community property laws) toall or a portion of the worker's account or is able to negotiate a right to such account in thecourse of divorce proceedings, it will be necessary to develop rules and procedures for satisfyingthe divorced spouse's rights.  For example, if a former spouse has the right to a portion of theworker spouse's account balance, it would be necessary to determine whether such formerspouse is (1) entitled to the payment of such amounts when either the former spouse or theworker spouse attained retirement age, (2) permitted to withdraw the amounts immediately fromthe worker's account, or (3) permitted to roll the amounts in the worker's account either into theformer spouse's own account or into some other retirement vehicle, such as an IRA.

**Issues associated with particular types of accounts**

Government held accounts.-In the case of a government held account, the administrationof spousal and survivor rights could be administered in much the same manner as such rights areadministered under the present-law FERS program.  Participants could be required to get writtenspousal consent to distributions (and to the form of distributions and the designation ofbeneficiaries) and survivors could submit claims for benefits to the governmental bodyadministering the plan.

Employer-sponsored plans.-In the case of an employer-sponsored plan, rules could bedeveloped to address the rights of current and former spouses and surviving spouses that aresimilar to the rules applicable under present law to qualified retirement plans.  Employers couldbe required to secure written consent from a participant's spouse prior to making distributionsunder the plan.  Similarly, the employer could require written consent to the form of distributionsand the designation of beneficiaries under the plan.  An issue that arises is whether the FederalGovernment would require copies of such consents in order to verify that an employer isadministering the plan in accordance with the applicable law.

	If employers are required to administer the rules relating to spousal and survivor benefits,the employers will want (1) rules that are clear and easy to administer and unlikely to result indisputes, (2) the Federal Government to make determinations with respect to any dispute thatdoes arise, and (3) to be protected from any liability to participants or their current or formerspouses or other beneficiaries if they follow the applicable rules.

Individual accounts.-Under an individual account system, it will be necessary to developprocedures for handling any rules relating to spousal and survivor benefits.  In general, financialinstitutions will not be accustomed to dealing with such matters as spousal consent and willprefer rules that are clear and easy to administer.  Many of the issues are similar to those foremployer-sponsored plans, although financial institutions are likely to be less willing toadminister the types of written consents that could be required.

**G.  Interaction with Employer-Sponsored Retirement Plans
	Social Security, individual savings, and employer pensions are commonly referred to asparts of a "three-legged stool" providing retirement income security.  If any significant changesare made to one of these elements, those changes could impact the other "legs" of the "stool."  Inparticular, creation of a new system of private accounts that are integrated with Social Securitycould affect the operation of employer-sponsored retirement plans.  It is difficult to examine thepossible effects on employer plans in the absence of a specific IPA proposal.  However, somegeneral observations may be made.

	As discussed in Part IV.B.2. below, one possible response of individuals to a new systemof IPAs could be to reduce other saving.  One way in which this might occur would be to reducesavings through employer-sponsored retirement plans.  For example, some individuals mayreduce their elective contributions to a section 401(k) plan.  Alternatively, employees could seekreductions in employer contributions to retirement plans and an increase in cash wages or otherbenefits.  Employers may be concerned about reductions in employer sponsored retirement planbenefits for a variety of reasons.  Some employers use retirement plan benefits as a means ofencouraging continued employment and rewarding long service (or, in other cases, inencouraging early retirement as part of downsizing).  Some employers may also be concernedthat their plan would have difficulty meeting applicable nondiscrimination rules.  For example, ifnonhighly compensated employee reduce their elective deferrals under a section 401(k) plan inresponse to an IPA proposal, then the plan might not satisfy the nondiscrimination test applicableto section 401(k) plans. 

	Present law contains rules that permit qualified plans to be formally integrated withSocial Security benefits.  These rules are based on the premise that employers are contributing toSocial Security and should in essence receive credit for such contributions in designing qualifiedplans.  In general, the integration rules provide that a qualified plan is not considered todiscriminate in favor of highly compensated employees merely because the contributions andbenefits under the plan favor highly compensated employees by more than the "permitteddisparity."  In the case of a defined contribution plan, the integration (or permitted disparity)rules permit a greater level of contribution for compensation in excess of the integration levelthan for compensation below the integration level.  In the case of a defined benefit plan, thepermitted disparity rules allow benefits provided in excess of the integration level to exceedbenefits provided below the integration level.  Defined benefit plans may also offset plan benefitsby an "offset allowance."  The permitted disparity rules will need to be examined if anysignificant changes are made to Social Security benefits and contributions.  Additional issueswill arise if an IPA proposal is adopted.  One issue that may arise is the extent to which thepermitted disparity rules would need to be revised to take into account the fact that a portion ofSocial Security benefits is funded with an IPA.

**H.  Other Administrative Issues**

**Enforcement and claims procedures**

	No matter what system of individual accounts is adopted, a variety of types of errors andomissions could occur.  For example, contributions may not be allocated properly to individualaccounts, errors may be made in implementing participant investment decisions (if allowed underthe proposal), employers may not file required information returns, and employers may notdeposit contributions as required.  Wilful violations of the law may also occur, for example,funds may be stolen or impermissible fees may be charged.   Rules will be needed to deal withdetection and correction of mistakes and errors, and penalties will be needed for wilful disregardof the law.  Procedures will also be needed to allow individuals to file claims if they believe anerror has occurred. 

	Any enforcement system will need to be tailored to the specific proposal, as well as thespecific violation.  For example, if the current payroll tax system is used to collect contributions,then the present-law enforcement rules under the payroll tax system may be used to enforce IPAobligations.  Decisions will need to be made as to what remedies are appropriate for particularmistakes or violations.  For example, if an error regarding investments has resulted in a loss tosome plan participants, equity may require that they be made whole.  It also will need to bedecided how errors in an individual's favor will be corrected.

**Effective date**

	Any new IPA system will require some lead time to implement.  For example, necessaryrecord keeping and other systems will need to be in place.  Implementation of the Federal ThriftSavings Plan took approximately three years from enactment.  Analysis of this implementationprocess may provide a guide as to what kind of start-up issues may arise under a new IPAproposal.  However, additional issues may arise under an IPA proposal that applies to allworkers, if for no other reason than many more individuals and accounts would be involved.  Thenecessary lead time will depend on the particular proposal adopted and the extent of changes toexisting systems required.

**IV.  ECONOMIC ISSUES RELATING TO PRIVATE ACCOUNTS
**A.  Private Account Accumulations and Annuity Values**

	The amounts that accumulate in IPAs would depend on the annual contribution levels, therate of return on the contributions net of all expenses, and the length of time over whichcontributions are made.   Table 1 shows the accumulations that would result under a proposal tocontribute two percent of payroll over a 35 year time period for varying wage levels and rates ofreturn.  The 5.5 percent real rate of return that is used for one of the examples is the oneProfessor Martin Feldstein of Harvard University cites as being the average annual return overthe past 50 years for a portfolio that is weighted 60 percent in stocks and 40 percent in bonds.(30)However, it is important to recognize that if any IPA proposal does result in an increase innational saving it is also likely to have an impact on future rates of return. For an economy toabsorb a large increase in saving, which many proponents claim would result from IPAs, itwould generally be expected that average rates of return would fall to absorb the new saving. The reason for this is assets are first invested in better investment opportunities and incrementalsavings are invested in more marginal investment projects, which can be expected on average toproduce a lower rate of return.  In addition, it is important to recognize that rates of return forindividuals will vary based upon the investment decisions made by each individual.  Manyindividuals will be conservative with their investments and avoid stocks, and thus their rates ofreturn may be lower than the average for those that invest in stocks.(31)   However, investing instocks is not a guarantee of a high rate of return, and low or negative rates of return will certainlyresult for some individuals.

**Table 1.--IPA Accumulations Per Couple**

**at Age 65, Year 2033**
**Real Rate**
**of**

**Return****Real Annual Wage Levels (and Annual Contributions) per Couple****$20,000**
**($400)****$40,000**
**($800)****$60,000**
**($1,200)****$80,000**
**($1,600)****$100,000**
**($2,000)****$120,000**
**($2,400)**3%$24,910$49,821$74,731$99,642$124,552$149,4625.5 %$42,306$84,612$126,918$169,224$211,530$253,8368%$74,441$148,882$223,323$297,763$372,204$446,645

Note:  Assumes annual contributions beginning in 1999 for 30 year old taxpayers.  Contributions are at a twopercent contribution rate, and wages are assumed split evenly between the spouses.  Additionally, the accumulationsshown assume no account expenses or taxes during the period of accumulation.

	The accumulations listed in Table 1 assume 35 years of contributions.  Thus, thesebalances are for year 2033, assuming IPA contributions began in 1999.  For the current baby-boom generation, accumulations by age 65 would be much smaller than are shown in Table 1, assuch individuals are much nearer to retirement.  Hence, any IPA proposal would have less of aneffect on current baby boomers.  For example, a couple that is currently 15 years from retirementand has combined wages of $60,000 would have accumulated only $28,369 by retirement at the5.5 percent rate of return as compared to the $126,918 that a younger couple would accumulateover a 35 year period. Table 2 shows accumulations for taxpayers retiring at various years in thefuture, and at various income levels.

**Table 2.--IPA Accumulations Per Couple at Retirement**
******RealAnnualWage**
**Level****RealAnnualContribution**
**Retirement Year********2005****2010****2015****2020********2025********2030********2035**$20,000$400$2,907$6,154$10,399$15,946$23,196$32,671$45,055$40,000$800$5,814$12,308$20,797$31,891$46,391$65,342$90,110$60,000$1,200$8,720$18,463$31,196$47,837$69,587$98,013$135,165$80,000$1,600$11,627$24,617$41,594$63,783$92,783$130,684$180,220$100,000$2,000$14,534$30,771$51,993$79,729$115,978$163,355$225,275$120,000$2,400$17,441$36,925$62,391$95,674$139,174$196,026$270,329
Note:  Assumes annual contributions beginning in 1999 and ending at retirement for the year shown.  Contributionsare at a two percent contribution rate, a 5.5 percent real return is assumed, and wages are assumed split evenlybetween the spouses. Additionally, the accumulations shown assume no account expenses or taxes during the periodof accumulation.

	The IPA accumulations could be converted to a life annuity (e.g., through the purchase ofa commercial annuity contract) at retirement to guarantee a steady income stream over the life ofthe retiree or over the lives of the retiree and his or her spouse.  If annuitized, theseaccumulations would provide insurance against living longer than average and having one'sretirement resources run out prior to death, in much the same way that Social Security does.

Of course, if the individuals covered by the annuity contract live a shorter period than theaverage life expectancy, the purchasers would have been better off in retrospect had they notpurchased the annuity.  Table 3 below shows the annual annuity value, per couple, of the IPAaccumulations shown in Table 1.  Amounts not yet paid to the annuitant are assumed to earn thereal rate of return stated in the table, and no administrative expenses or other costs are assumed.(32)For the purposes of the annuity calculation it is assumed that a level amount would be fundeduntil the last of the spouses dies, and that on average that would occur after 25 years for a coupleboth aged 65 at retirement.(33)   Table 4 shows similar annuity values for the IPA accumulationsshown in Table 2 for persons retiring in the near future, who would have smaller accumulationsin their IPAs.

**Table 3.--IPA Annual Real Annuity Value Per Couple**

**at Age 65, Year 2033**
**Real Rate**
**of**

**Return****Real Annual Wage Levels (and Annual Contributions) per Couple****$20,000**
**($400)****$40,000**
**($800)****$60,000**
**($1,200)****$80,000**
**($1,600)****$100,000**
**($2,000)****$120,000**
**($2,400)**3%$1,418$2,835  $4,253    $5,670   $7,088   $8,505   5.5 %$3,118$6,235  $9,353   $12,470$15,588 $18,705 8%$6,892$13,789$20,684 $27,578$34,473 $41,367 
Note: Assumes annual contributions beginning in 1999 for 30 year old taxpayers.  Contributions are at a two percentcontribution rate, and wages are assumed split evenly between the spouses. Additionally, the accumulations shownassume no account expenses or taxes during the period of accumulation.  At retirement, a joint/survivor annuitypaying level benefits is purchased, with the survivor expected to live 25 years from age 65 according to InternalRevenue Service life expectancy tables of Publication 590.  Unpaid annuity amounts are assumed to earn the samestated real return as during the accumulation phase of the IPA balance that purchased the annuity.  No costs ofselling or annuity administration are assumed.

**Table 4.--IPA Annual Real Annuity Value Per Couple**

**at Retirement**
******RealAnnualWage**
**Level****RealAnnualContribution**
******Retirement Year****2005********2010********2015********2020********2025********2030********2035**$20,000$400   $214$453$766   $1,175$1,709$2,408$3,320$40,000$800   $428$907 $1,533 $2,350$3,419$4,815$6,640$60,000$1,200$643  $1,361 $2,299 $3,525$5,128$7,223$9,960$80,000$1,600$857   $1,814$3,065 $4,700$6,837$9,630$13,281$100,000$2,000$1,071 $2,268$3,831 $5,875$8,546$12,038$16,601$120,000$2,400$1,285 $2,721 $4,598$7,050$10,256$14,445$19,921
Note:  Assumes annual contributions beginning in 1999 and ending at retirement for the year shown.  Contributionsare at a two percent contribution rate, a 5.5 percent real return is assumed, and wages are assumed split evenlybetween the spouses. Additionally, the accumulations shown assume no account expenses or taxes during the periodof accumulation. At retirement, a joint/survivor annuity paying level benefits is purchased, with the survivorexpected to live 25 years from age 65 according to Internal Revenue Service life expectancy tables of Publication590.  Unpaid annuity amounts are assumed to earn the same stated real return as during the accumulation phase ofthe IPA balance that purchased the annuity.  No costs of selling or annuity administration are assumed.

**B.  General Economic Issues**

**1.  Overview**

	A number of important economic issues arise with respect to the possible establishment,funding, and administration of a system of IPAs. At the individual level, the key questionsconcern how such accounts would be funded, how they would be taxed, what level ofaccumulations could be expected in the accounts at retirement, and what interactions, if any, theaccounts would have with the current Social Security system.  At the national level, the keyquestions are whether such accounts can be expected to increase national saving, and whetherthey can be expected to provide adequate retirement income in conjunction with the SocialSecurity system.  The combination of decisions with respect to funding, taxation, and interactionwith Social Security would determine the net effect of any IPA proposal on the overallprogressivity of the tax and benefit system as well as on the intergenerational distribution of taxburdens.

	Though the current interest in individual accounts owes its origin, in part, to the long-term funding problem of the current Social Security system, a system of individual accountscould be established that has no connection to the current Social Security system.  Indeed, suchaccounts already exist in many forms today, including IRAs and section 401(k) plans.  Suchaccounts are privately managed and receive favorable tax treatment and thus provide a model formany individual account plans currently under discussion.(34) To the extent that an individualaccount plan is effectively an expansion of IRAs or section 401(k) plans, the economic issuesinvolved mirror those for the establishment of IRAs, and include such issues as the distributionof the tax benefits and whether such plans stimulate saving.

	 For the purposes of most of the economic analysis to follow, it is assumed that the IPAaccounts would be integrated with Social Security in some way to cause a reduction in present-law Social Security benefits that is proportional to one's IPA accumulations.  Without such aninteraction, the IPAs would not be an instrument for addressing the long-term projected SocialSecurity funding shortfall.  A system of IPA accounts that is linked to Social Security wouldcontinue to raise the same economic issues that attend other saving vehicles, and would includesuch issues as the impact such accounts would have on national saving.  The link to SocialSecurity benefits also raises additional economic issues. Reducing Social Security benefits byIPA balances is implicitly a tax on such benefits (or the IPA balances). Issues associated with theinteraction with Social Security include how the implicit tax would be imposed, how the burdenof the tax would be borne both within and across generations, and how investment restrictionsimposed to limit the risk of accounts could distort capital markets.  These and other issues arediscussed below.

**2.  Impact on national saving**

	Economists generally concur that increased national saving would be in the interest of thelong-run economic health of the U.S. economy.  Without adequate national saving, a nation maybe constrained in its ability to undertake investments that are necessary to maintain and improvethe capital stock.(35)  A larger capital stock would mean more productive workers and higher futureliving standards.

	The impact of any IPA proposal on national saving would depend on how the IPAs arefinanced.  If new tax revenues are raised to fund the accounts, national saving would increaseunless taxpayers reduced their other savings by the full amount of the tax increase necessary tofund the IPA.  If taxpayers reduced their current consumption to fund at least a portion of the taxincrease that funded the IPAs, national saving would rise.

	Some proposals would use the projected Federal budget surpluses to fund IPAs.  Becausenational saving is equal to the sum of private saving (which includes personal saving andbusiness saving) and government saving, a government surplus (i.e., government saving) meansthat the government is contributing to national saving (a government deficit would mean that thegovernment is borrowing and reducing national saving).  Because the Federal Government isprojected to run growing surpluses, national saving would increase *if the surpluses actuallyoccur* and are not offset by decreases in private saving.  Again, because national saving is equalto the sum of private  saving and government saving (i.e., surpluses), trading a dollar of thisprojected government saving for a dollar of private saving would leave national savingunchanged.   Reducing this projected government saving without increasing private saving wouldcause national saving to fall from the levels it otherwise would have attained.  If, for example,the projected surpluses are used to finance tax cuts or spending increases, government savingwould be reduced.  Depending on the policies financed through the tax cuts or spendingincreases, private saving may or may not increase by the amount by which government savingfalls.

	The impact on national saving of using surplus revenues to fund IPAs would depend onwhat one assumes would be the level of national saving in the absence of such use of thesurpluses, which in turn depends on the alternative uses of the projected surpluses.  Thealternative uses of the projected budget surpluses would include (1) using the surpluses to buydown the national debt, (2) using the surpluses to finance tax cuts, or (3) using the surpluses toincrease government spending.

	Compared to the option of using the surpluses to buy down the national debt, IPAproposals would likely have an indeterminate effect on national saving, even though they arelikely to boost personal saving.  National saving would be unchanged if, instead of using thesurpluses to buy down the national debt, it is effectively used to increase personal saving dollarfor dollar (such as, perhaps, in an IPA).  That is, a dollar of government saving (buying down thedebt) would be traded for a dollar of personal saving (the IPA), leaving national savingunchanged.  National saving would fall, relative to the level it otherwise would have been underthe assumption that the government runs a surplus, if the system of IPAs were established andindividuals made any reductions in other personal savings as a result.  This could occur if someindividuals choose to reduce other savings in response to the establishment of an IPA on theirbehalf because they feel that their current savings and saving rate are sufficient to meet theirretirement and other saving needs.  To the extent that any individuals do reduce other savings inresponse to an IPA contribution, then the full dollar IPA contribution would not represent a fulldollar increase in personal saving.(36)  And because each dollar of financing for the IPA representsa dollar that could have been used to increase national saving by buying down the debt, the neteffect of this and the reduction in other personal saving implies that national saving would beless than it otherwise would have been.  Finally, national saving would rise, relative to the levelit otherwise would have been under the assumption that the government runs a surplus, if thesystem of IPAs were established and individuals increased other personal savings as a result. This could occur if, in response to the establishment of the IPA, some individuals were mademore aware of the benefits of saving and chose to increase their other personal saving as a result. The magnitude of this response by some individuals would, however, have to exceed anyreduction in other savings from other individuals.

	Compared to the option of using the surplus either to finance general tax cuts or toincrease spending on government programs, the establishment of IPAs would almost certainlyincrease national saving. While some portion of a tax cut would be saved and any increasedgovernment spending would free up other resources a portion of which could be saved, neither ofthese responses is likely to have the same effect on national saving as would a system ofmandatory personal IPA saving.  Although some individuals might decrease other forms ofsaving as a result of the forced personal IPA saving, many individuals would not have sufficientsavings to do so even if they desired, and for these individuals personal savings would increase. So long as the individuals who decreased their non-IPA personal savings did not do so by morethan a dollar for each dollar of IPA contributions, national savings would rise.(37)

	The above discussion has assumed that individuals would have no access to IPA fundsuntil retirement.  If penalty-free access to the IPA funds were allowed for specified purposes,such as is allowed under present law from IRAs and employer-sponsored retirement plans, thepotentially positive impact on national saving would be diminished.  If access to the IPA fundswere allowed for any purpose upon payment of a penalty, such as is allowed under present lawfrom IRAs, any increment to national saving would be diminished.  The extent of the reductionwould depend on the extent to which individuals take early access to the funds, which in turnwould depend on the magnitude of the penalty for early withdrawal, as well as on any additionaltaxes imposed on the withdrawal.  Because it is assumed that IPA contributions would bemandatory, any access to the account balances would result in dissaving.  This result contrastswith IRAs, in which contributions are voluntary.  Some have argued that access to IRA balancesmay actually increase national savings because taxpayers will be more willing to make the IRAcontributions if they have access to the balances.

	The issue of early access to the funds, with or without penalty, is of critical importance ifIPAs would be coordinated with Social Security benefits.  If, for example, Social Securitybenefits were reduced as a result of withdrawals from IPAs in retirement, there would be anincentive for individuals to access their IPA funds early, prior to retirement, so that they wouldbe eligible for full Social Security benefits upon retirement.  To the extent IPA funds werewithdrawn early in order to avoid the Social Security benefit reduction, and spent rather thansaved, the proposal would have less of a positive impact on national saving.  For furtherdiscussion of integrating Social Security benefits with IPA withdrawals, see Part IV.B.3 belowand and Part III.E.4 above.

**3.  Funding and tax treatment of IPAs; coordination of IPAs with Social Security**

	The decisions regarding the source of funding for the IPAs and the taxation (including theoffset of Social Security benefits) of the IPAs will ultimately determine the distributional impact,both within and across generations, of the establishment of a system of IPAs.

**Funding of accounts**

	As described above, the IPA accounts could be funded in a variety of ways.  The mostcommonly discussed funding methods have been the dedication of a portion of payroll taxes toIPAs, funding an amount equal to a portion of payroll out of general revenues, or "use of thesurplus."  Use of the projected surpluses is equivalent to the use of general  tax revenues to fundthe accounts.  Tracing the source of the surpluses to payroll taxes, or income taxes, or corporatetaxes, or excise taxes, etc., is not an easy task, but the revenues that create the projected surplusesnonetheless represent a tax burden that ultimately falls on individuals.

	While various administrative mechanisms for funding IPAs have been discussed, theimportant economic question concerns the ultimate source of the funds--that is, who bears theburden of any taxes used to finance the accounts. Setting aside the issue of the tax treatment ofaccount withdrawals and any Social Security interaction, any approach that does not requirefunding from a taxpayer's own after-tax dollars, or that does not fund an individual's account indirect proportion to that individual's tax payments, would change the progressivity of the tax andbenefit system.(38)  In this regard, it is important to note that the funding of IPAs in directproportion to an individual's burden from a new tax is equivalent to funding them from ataxpayer's present-law after-tax income.(39)  Similarly, if IPAs could be funded from projectedsurplus revenues in direct proportion to each individual's contribution to such surpluses, this toowould be the economic equivalent of funding IPAs from after-tax dollars while maintaining thesame progressivity of taxes that fund other government benefits.

	Proposals that are based on a tax on payroll would not alter present-law progressivityprovided that IPAs are funded in direct proportion to the tax.  However, if additional funds weredirected to lower earners, as some proposals have suggested, the tax and benefit system would bemade more progressive. Similarly, if general revenues were used to fund such accounts, the taxand benefit system would be more progressive unless such accounts were funded proportionallyto each individual's general tax burden (primarily Federal income taxes).  The use of theprojected surpluses to fund the accounts would not, as mentioned above, mean that tax revenuesare not being used to fund the accounts.  Funding the accounts with the projected surpluseswould mean that tax revenues will have to be higher than they otherwise would have to be in theabsence of IPAs funded by government revenues.  The distributional impact of funding theaccounts from the projected surpluses depends on who bears the burden of the taxes that producethe projected surpluses.  As a practical matter, once a proposal is adopted that draws on the fundsthat would have created the surplus, there is no longer a projected surplus.  At that point, therewould simply be a policy in place to fund IPAs from tax revenues, the precise burden of whichwould evolve over time as future Congresses continue to alter tax policies.

	An alternative way to fund IPAs would be to require that individuals contribute to IPAsfrom their after-tax dollars.  This approach would be the economic equivalent of establishing atax on such individuals and immediately returning the money to them with the requirement that itfund an IPA account. For example, a new payroll tax of two percent could be imposed onindividuals; the tax could be collected as is the current payroll tax, and transferred to anindividual's IPA.  With respect to this funding mechanism, there would be no change in the nettaxes/benefits that an individual experiences from government policies, provided that IPAsreceive tax treatment similar to other taxpayer investments made from their own after-taxresources.

	Finally, the IPAs could be funded with pre-tax dollars.   For example, a new payroll taxof two percent could be imposed and transferred to an individual's IPA.  However, unlike thepresent-law employee share of the payroll tax, a Federal income tax deduction would be allowedfor the amount of the tax. Such funding would be the equivalent of the present-law funding ofdeductible IRAs or section 401(k) plans.

**Taxation of accounts**

	The establishment of IPAs raises important questions concerning the appropriate taxtreatment of such accounts.  The choice of tax treatment will affect the overall progressivity ofthe Federal tax system and the intergenerational distribution of tax burdens.  Depending on whatpolicy objectives are being pursued, different tax treatments would be appropriate.  A given taxtreatment on the distribution of funds from the IPA would have different implications dependingon the source of funding of the IPA.

	Withdrawals from an IPA could be taxed in a variety of ways.  No particular way can besaid to be appropriate, but different approaches have different parallels to present law.  If weassume that the accounts are effectively funded from a taxpayer's after-tax dollars, then the taxtreatments most closely resembling aspects of the present law treatment of investment incomewould be (1) tax the earnings and any capital gain realizations on an annual basis at ordinaryincome rates, or capital gains rates, as appropriate; (2) tax the earnings and any capital gainsupon withdrawal at ordinary income tax rates; or (3) impose no taxes.  The first approach wouldtax the investment income in the same manner that a taxpayer's ordinary after-tax investmentswould be taxed--i.e. the same way that any investments made from after tax dollars invested instocks, bonds, real estate, etc., would be taxed.  The second approach would be equivalent totaxing the earnings and capital gains in the same manner that nondeductible IRAs are currentlytreated.  That is, deferral on the earnings and capital gains would be allowed, but uponwithdrawal all investment income would be taxed at ordinary rates.  The third approach would besimilar to the treatment afforded Roth IRAs under present law.

	If the accounts were effectively funded from a taxpayer's pre-tax dollars, the only taxtreatment analogous to present law would be similar to that of (2) above, but with the inclusionof a tax on the principal withdrawal as well.  Such taxation would be analogous to the present-law treatment of deductible IRAs or of section 401(k) plans.

	Finally, it is possible that the funding for some of the accounts is, in whole or in part, atransfer payment.(40)  If an individual's IPA is funded out of someone else's tax dollars, thatexpenditure would generally be considered a transfer payment.  A comprehensive income taxwould generally treat the IPA transfer as income, and tax it accordingly.  If it were exempt fromincome taxes initially, and distributions, including the distributions of principal, weresubsequently taxed, the IRA would be given tax treatment analogous to that of a deductible IRAor a section 401(k) plan.  Alternatively, if the IRA were taxed as income upon receipt of thetransfer, the implications of the subsequent tax would be the same as that for investment incomefrom after-tax dollars, as is laid out in points (1) through (3) above.  

**Interaction with Social Security**

	IPAs could interact with Social Security in a variety of ways.  On the funding side, someproposals have discussed using a portion of the current payroll taxes to fund the accounts.  Sucha use of the payroll taxes would exacerbate the projected financial shortfall in meeting futureSocial Security obligations unless countervailing measures were taken.  One such countervailingmeasure would be to reduce present-law Social Security benefits by some amount which isconditioned on the ultimate accumulations in an individual's IPA.   Present law Social Securitybenefits could be reduced in such a manner regardless of how IPAs were originally funded - i.e.,whether they were funded out of a portion of current payroll taxes or not. Any such reduction inSocial Security benefits would be the economic equivalent of a tax. 

	To understand the interaction of IPAs with Social Security as a tax, consider thefollowing example.  Take the case of an individual with $100 in wage income in his workingyears on which $20 is paid in taxes. His promised Social Security benefits are $20 in hisretirement years.   If the taxpayer does no saving, he would consume $80 in his working life, and$20 in Social Security benefits during retirement.  If the taxpayer has the option to contribute $2from his after-tax income to a Roth IRA(41), which is assumed to grow to $5 by retirement, thetaxpayer can choose to reduce consumption in his working life to $78 in exchange for raising hisretirement income to $25.  This can be taken as a simplistic representation of present law.

	Now consider the addition of a system of IPAs in which the accumulations result in apartial reduction in Social Security benefits, say 50 cents on the dollar.  We consider as the basecase the situation in which the individual is required to fund the IPA out of his own after taxdollars.  Such funding would imply no changes to the system of taxes in place to fund othergovernment programs, and thus no changes to the progressivity of the tax system.  Taking thecase of the individual above who does not chose to contribute to a Roth IRA, if a $2 IPA isfunded from his after-tax dollars(42), the individual's consumption during his working life wouldbe restricted to $78.  The IPA is assumed to be invested in the same assets that the Roth IRA wasin the previous example, and thus grows to $5 at retirement.  As was previously discussed, if notaxes are imposed on the $5 IPA withdrawal, the IPA would be the equivalent of a mandatoryRoth IRA.  If the individual's previously-promised Social Security benefits are reduced as aresult of the IPA withdrawal, it is clear that his retirement consumption is restricted relative topresent law, i.e. his taxes have been increased.  If the taxpayer loses 50 cents for each dollar ofIPA withdrawal, the individual's Social Security benefits would fall by $2.50, to $17.50.  Theindividual's retirement income is thus $22.50 ($17.50 from Social Security plus $5 in the IPA),assuming no other explicit or implicit taxes on the IPA accumulations.  Relative to the personwho contributes the $2 to a Roth IRA under present law, the taxpayer has the same consumptionof $78 during his working years, but his retirement income is $2.50 less.  If other federal taxesare imposed on the IPA, such individual's retirement consumption would be further restricted.

	Relative to the Roth IRA treatment, the individual is subject to a large effective tax rateby virtue of the Social Security benefit reduction.  In this example, of the $3 gain in the value ofthe IPA, $2.50, or 83 percent, is effectively taxed away by the reduction in Social Securitybenefits.  The reduction in Social Security benefits means that the individual is required tofinance a larger share of his own retirement income relative to present law.  Because SocialSecurity has historically been financed on a pay-as-you-go basis, the reduction in Social Securitybenefits implies that lower payroll taxes on the next generation of workers would be required tomeet the Social Security benefits of the initial generation of workers that retires with IPAs. Hence, an implicit tax burden of future workers has been shifted to the present generation ofworkers to the extent that Social Security benefits are reduced as a result of IPA accumulations.In essence, the initial generation of workers that would retire with IPAs is required to pre-fund aportion of its own Social Security benefits, while continuing to pay the taxes necessary tosupport current retirees.  The subsequent generation of workers would also be required to prefunda portion of its Social Security benefits, but this generation would be absolved of financing thefull Social Security benefits of the generation of workers that preceded them, since this precedinggeneration would have contributed to IPAs themselves.

	Any interaction of Social Security benefits with IPA withdrawals greatly complicates theother design features of the IPA system.  First, if the IPAs are to be effectively highly taxed as aresult of the interaction with Social Security benefits, it is clear that they would have to be mademandatory, as other saving options would be more desirable to the individual.  Early withdrawalsfrom IPAs would also have to be closely scrutinized.  If withdrawals are permitted to be madeprior to retirement for certain purposes, it is likely that many people would make suchwithdrawals in order to avoid the effective tax on their Social Security benefits in the future.  Tothe extent such withdrawals are made to avoid a Social Security benefit reduction, greater outlaysof Social Security would result when such individuals do retire, and to the extent the IPAs weremeant to reduce future Social Security outlays, they will have been less successful as a result ofthe early withdrawals.

**4.  Account investment issues**

**In general**

	There are several important economic issues to consider with respect to investment ofIPA funds.  Most of these relate to restrictions on investments that might be desirable to imposein order to meet the intended social goals of establishing IPAs.

	A commonly discussed restriction concerns requiring that the accounts be managed bydesignated professional money managers offering funds satisfying certain criteria, such as investing in a diversified selection of stocks or bonds.  The Federal Thrift Savings Plan(discussed in Part II.C above), which offers a limited selection of funds and restricts tradingactivity, is often cited as a model of how IPAs might work.  A restriction on the type of fund thatIPAs might be invested in that is often advocated is that the fund be designed to mimic anestablished index of stocks or bonds, such as the Standard & Poors 500.  There are two primaryreasons for advocating such a restriction.  First, the companies in the index are 500 of the largestU.S. corporations, representing over two-thirds of the total U.S. market capitalization, and arethus likely to provide stable returns over the long term.  Second, by investing in an index ofstocks or bonds, trading activity expenses are kept to a minimum, ensuring that a larger share ofaccounts is ultimately available for retirement consumption.(43)  Such expenses can be quitesubstantial over the long term. For example, a $100 invested in a fund that generates a 10 percentannual pre-expense return  will be worth $1,327 after 30 years if the fund incurs annual expensesequal to one percent of capital under management. The same fund incurring a two percentexpense charge would be worth only $1,006 after 30 years.  Clearly, for a given contribution,more funds will be available to finance retirement consumption the lower are expenses inmanaging the account.

	Another area in which restrictions might be imposed is in the allocation of investmentsacross eligible classes of investment--that is, the investment mix of stocks versus bonds, or otherpossible investments.  An all-stock allocation is expected to yield higher returns, but also to beaccompanied by higher risk.  Conversely, an all-bond investment is expected to produce lowerreturns, but is expected to produce its expected return with more certainty than a stockinvestment.  This raises the questions of whether particular allocations of investments should bemandated.  Some would argue that requiring a particular mix of stocks and bonds would yield thedesirable risk/return profile.  However, a given allocation is not likely to be appropriate for allindividuals.  Older individuals might wish to pursue a more conservative approach, owning morebonds, as they are nearer to retirement and have greater need for certainty in their asset values. Younger individuals might prefer a more aggressive approach more heavily weighted in stocks,in hopes of gaining a higher return, but knowing that if the investments should fail they have agreater share of their working lives ahead of them to make up for the losses.  Additionally, anindividual's desired allocation might depend on what assets are held outside of the IPA.  If anindividual has substantial stock ownership outside of the IPA, such an individual might prefer alarger share of bonds in their IPA.  In general, individuals attitude towards risk will vary, andhence portfolio allocations should be expected to vary across individuals.

	If any individual discretion would be allowed in the investment of IPA funds, even ifsuch discretion is merely a matter of the investment mix across a restricted set of designatedprofessionally managed funds, the issue arises of how individual account holders will acquire thenecessary information to make informed choices.  Such education would need to includeeducation as to the expected risk and return of particular investments, as well as perhaps adviceon desirable investment mixes across stocks and bonds for account holders of particular ages. Such educational efforts will add to the expense of establishing and maintaining IPAs, though theregulation and disclosure requirements currently imposed on the mutual fund industry wouldprovide a guide for, and give some indication of the likely expense of, certain of the investoreducation efforts.  In a broad based IPA system, certain of the account holders are likely to haveless financial education that the typical mutual fund holder, and greater educational efforts mightbe required for such investors to learn to make informed investment choices.

**Capital market and investment distortions**

	Any system of IPAs that requires investments in particular assets has the potential todistort the free flow of investment capital, especially if IPAs ultimately contain a large share ofprivate savings.  For example, a rule requiring only stock investments in a given index mightmake it easier for the firms in that index to raise investment capital relative to firms not in theindex, and thus lead to a different mix of aggregate investment activity than would otherwiseprevail in the absence of such requirements.   If the designated index contains relatively largestocks, such companies might be given an additional advantage, at least during the start-upperiod of IPA formation, in raising capital, leading to a greater concentration of economicactivity in larger firms.  Large mandated purchases of particular stocks are likely to bid up thevalue of such stocks relative to other stocks, and lower the expected return on future purchases ofthose stocks.  A parallel concern arises when the assets in the IPA are sold. While during thestart-up phase of IPA establishment there would be more purchases than sales of the stocks in theindex, when the system is fully phased in there would be times when sales exceed purchases, andvice versa. If, for example, annuitization of IPA balances is required at age 65, mandatory salesof the aggregate IPA stocks in the index might at times exceed mandatory purchases in youngerworkers' IPAs, leading to downward pressure on the valuations of the stocks in the index.  Asdemographics shift over time, this situation could reverse itself repeatedly, with certaingenerations buying at times when net IPA purchases are positive, pushing up prices, and sellingwhen net IPA purchases are negative, pushing down prices. 

	In general, to the extent that a system of IPAs prescribes investment in establishedchannels, the availability of financing for many small businesses, or potential small businesses,will to some degree be constrained.  For example, as the most readily available source ofinvestment funds for many small businesses is the proprietor's own savings, any system ofmandatory individual accounts with constraints on investment choice will reduce the amount ofsavings available to finance one's own business activity.  To the extent that this would limitentrepreneurial activity, long run economic growth could be impaired.

	In addition to their potential to distort investment activity as a result of restrictions onavailable investments, IPAs could distort investment activity if the investment performance ofthe funds is in any way guaranteed.  Such guarantees could include certain interactions of theIPA outflows with Social Security benefits.  If the performance of one's IPA is in any wayguaranteed, an incentive is created to pursue higher-risk investments. A government guarantee ofa fund's performance would limit the downsize risk to the individual, and lead to increased risktaking.  While it could be argued that to some degree a government stimulus to risk taking wouldbe desirable in order to improve aggregate average investment returns (assuming such investmentpossibilities exist with higher than  average returns but which are not undertaken due to the risk),a stimulus would go too far if it resulted in a situation where the government was  more of apartner in an investor's losses than in the gains.(44)  For example, consider a case where thegovernment guaranteed that your IPA plus a lump sum Social Security benefit would be worth atleast $10,000 at retirement.  Now consider an individual on the cusp of retirement with $10,000in an IPA, with two investment possibilities.  One will yield either a $1,000 or a $3,000 returnwith equal probability, for an expected average return of $2,000.  The other will yield either aloss of $5,000 or a gain of $5,000 with equal probability, for an expected average return of $0.  Thus the former investment has both a higher expected value and is less risky in the sense thatthe return will be close to its expected value.(45)  To the typical risk averse or risk-neutralindividual, it is clearly the better investment.  To the economy as a whole, it is clearly the bestinvestment as, across multiple individuals, it promises an average 20 percent return, whereas theother investment promises a 0 percent return, which will lead to no economic growth.   Now, ifthe government guarantees that the IPA plus a lump sum Social Security benefit will be worth atleast $10,000, it effectively is guaranteeing the replacement of all of the losses from theinvestment.  Thus, to the individual involved, the risky investment actually has no downside risk,since the government will make up all the losses. Thus, the expected private return becomes$2,500 (� times $0 + � times $5,000) even though the true social expected return is $0.  Thisexpected return is now greater than the preferred investment, and thus the incentives will inducesome to make this investment, even though from society's standpoint such investment is notdesirable.   While the above example is recognized to be extreme, it illustrates a problem thatwill exist to some degree to the extent that the government guarantees the performance of aportfolio where the manager of the portfolio can choose among assets of varying degrees of riskand expected return.  On the other hand, providing no guarantee of at least a minimal SocialSecurity benefit raises other social policy issues.  Without a minimal benefit, some individualswill not have sufficient retirement income.

**V.  BACKGROUND INFORMATION RELATING TO		RETIREMENT SAVINGS
**A.  Economic Status of the Elderly**

**Sources of retirement income**

	Social Security is the largest source of retirement income (39 percent in 1996), followedby wage and salary earnings (22 percent in 1996), employee pensions, annuities, and alimony (18percent in 1996), and income from assets (17 percent in 1996).(46)  Figure 1 shows this breakdownof sources of retirement income.

	Many researchers have attempted to measure whether individuals have adequate savingsfor retirement. A common measure of retirement savings adequacy is called the replacement rate,which is defined as the ratio of the individual's retirement income to income during theindividual's working years.  A replacement rate of 100 percent means that the person's incomeduring retirement is equal to their income during working years.

**Figure 1
	The issue of what replacement rate should be considered adequate depends on a numberof factors.  There are a number of reasons that a replacement rate of 100 percent may not beoptimal. First, people may desire to have more income during their working years because someof that income is saved for retirement. If people choose to have constant consumption over time,they save during their working years and dissave during retirement. Thus, if a household has a10-percent saving rate during their working years, a 90-percent replacement rate would besufficient for the household to maintain constant consumption in retirement. Second, mostelderly own their own homes.  In 1996, more than 81 percent of those households headed by anindividual aged 65 to 74 and 75.3 percent of households headed by an individual age 75 or overowned their own homes.(47)  Most of these households have paid off their mortgages. Only 25percent of households headed by a person aged 65 to 74 years old had any mortgage or homeequity debt. Among households headed by a person aged 75 years or older, only seven percenthad any mortgage or home equity debt.(48)  Thus, most elderly receive housing without incurringany expenses beyond maintenance, property taxes, insurance, and utilities, whereas during theirworking years, these individuals were likely to have been making mortgage payments. Third, fewelderly households care for children; therefore, household expenses are likely to be lower.Fourth, the elderly are generally covered by Medicare, which provides insurance against largemedical expenses and pays for most medical expenditures. Fifth, retirement income generallybears a lower tax burden than does wage income.  Salaries and wages are subject to the payrolltax.  Retirement benefits are not.  Also, Social Security benefits, which represent the majorsource of retirement income, are largely untaxed.(49) Thus, Social Security benefits can be smallerthan income earned during the working years and still provide the same after-tax income. For thelowest income groups, this effect is not large since earned income is subject to the payroll tax,but may not be subject to the income tax.

	These arguments suggest that the appropriate replacement rate for the elderly to haveadequate retirement income is less than 100 percent. However, some factors may suggest that thereplacement rate should be higher than 100 percent.  First, although the elderly are covered byMedicare, they are also more likely to incur large medical expenses (e.g., expenses forprescription drugs) which may not be completely covered by Medicare.  Similarly, Medicaregenerally does not cover nursing home care or the costs of care in other long-term care facilities,and only those elderly poor enough to receive Medicaid or eligible through veterans' assistancewill have coverage for such benefits.  Second, the elderly may find it necessary to hire serviceproviders for tasks that younger households provide for themselves.  For example, elderlyhouseholds may contract for home repair work that younger households self-provide.

	Replacement rates for Social Security and pension income for retired workers commonly are calculated using two methods. The first method calculates the ratio of Social Security andpension benefits relative to a worker's highest career earnings.(50) Career high earnings overstateaverage earnings.  The second method calculates benefits relative to the average earnings in thefive years preceding retirement.(51)  However, for many workers, their peak earning years are notthe years immediately prior to retirement. Consequently, earnings during the five years precedingretirement may understate average earnings. Thus, these two replacement rates may be seen asupper and lower bounds of estimates of the replacement of average career earnings. Thesereplacement rates measure the replacement of income through retirement benefits, and do notinclude any income earned during retirement or any income from savings. For individuals whoretired in the mid to late 1980s, such calculates indicate that Social Security and pension benefitsreplace roughly 33 percent of the career high earnings and 50 percent of earnings over the lastfive years for individuals. When spousal benefits are taken into account, replacement rates areslightly higher, averaging 30 to 33 percent of highest earnings, but 60 to 70 percent of last five-year earnings.  These calculations also demonstrate that replacement rates are highest for thepoor. For the lowest income quartile, individual replacement rates varied between 34 and 39percent of highest earnings, and 72 to 94 percent of last earnings.(52)

	Analysis of more recent retirees suggests similar outcomes.  A recent study calculatedreplacement rates for families with at least one individual between the ages 52 and 61 in 1992. Such individuals generally would be expected to retire between 1993 and 2006.(53)  This studyattempted to account for all sources of non-earnings income of retiree households: social securitybenefits; pension benefits; private saving; equity in personal residences; and equity in businessassets.  The authors calculate that, in 1992, prior to actual retirement, these households, onaverage, held assets sufficient to produce income in retirement that would replace 86 percent oftheir pre-retirement income.  For households in the median 10 percent of the population (i.e.,those with incomes between the 45th and 55th percentiles of the income distribution), thereplacement rate was 97 percent.  The bottom 10 percent of earners had the highest replacementrates and the top five percent of earners had the lowest replacement rates.(54)  However, otheranalysts reviewing the same data suggest a less optimistic outlook.  They conclude that, projecting continued accumulation of pension benefits, continued accumulation of earnings onexisting financial assets, and continued reduction in mortgage debt prior to retirement, if themedian household intended to retire at age 62, it would need to save 16 percent of future annualpre-tax earnings to preserve pre-retirement consumption.  The authors observe that a saving rateof 16 percent exceeds the median household's observed saving rate of approximately 5 percent.(55)

	Finally, Social Security benefits have increased over time. Social Security benefitsrelative to the income of the elderly have increased substantially over the past 40 years.  On theother hand, a current concern is whether the Federal Government will be able to continue payingthe promised benefits.  If benefits were to be reduced for future retirees, the replacement ratesreported above would overstate likely future replacement rates.

**Poverty**

	Another method used to examine the economic status of the elderly is to compare theirrates of poverty to those of the general population. Poverty among the elderly has declineddramatically over the last 30 years, from over 35 percent in 1959 to 12.6 percent in 1985. By1985, the poverty rate of the elderly was less than the poverty rate of the general population. In1996, the poverty rate of the elderly was 10.8 percent and the poverty rate of elderly personsliving in families (with a spouse or children) was 5.6 percent, lower than for any other group.(56)The major explanation for this decline in poverty is the increase in Social Security benefits andcoverage described above.

**B.  Expected Retirement Income and Needs of Current Workers**

	The above discussion demonstrates that, as a group, the elderly are as well off as the restof society, indicating that savings were adequate given current Social Security and currentpension benefits.  However, to determine whether the savings of current workers are enough toprovide adequate retirement income, it is necessary to examine how this group might differ fromcurrent retirees.

**Social Security and employer-provided pension plan coverage**

Social Security coverage.--Because Social Security coverage of workers has increasedover time,(57) and because the labor force participation of women has also been increasing, currentworkers are more likely to be covered by Social Security than current retirees.  In 1996, out ofmore than 150 million workers, 6.6 million workers were not in employment covered by SocialSecurity.  Most of these were Federal, State, and local government employees.  The percentageof uncovered workers will further decrease in the future as all Federal employees hired after 1983are covered and beginning in 1991 all State and local employees who are not members of apublic retirement system were mandatorily covered under Social Security.

Current pension coverage.--Similarly, pension coverage of current workers is alsosubstantially larger than that of current retirees.(58)  The term "covered," as used here, means thatan employee is accruing benefits in an employer pension or other retirement plan. The bestcurrent comprehensive evidence on pension coverage comes from a supplement to the April 1993Current Population Survey conducted by the Bureau of the Census.  The data referred to belowcome from that survey unless otherwise noted.

	As of April 1993, 63 percent of full-time wage and salary workers employed in theprivate sector reported that they worked in firms with an employer-sponsored pension plan. Half 

of the full-time wage and salary workers employed in the private sector were covered by anemployer-sponsored pension plan. Most of these workers were covered by single defined 

benefit or defined contribution plans (23 percent), and another 10 percent had both a definedbenefit or defined contribution and a 401(k) type contributory plan (see Table 5).(59)  For another17 percent, the 401(k) type plan was their only retirement plan.

	Pension coverage varies substantially among full-time, privately employed workers.Differences depend on the age of the worker, job earnings, the industry of employment, and thesize of the firm.  Younger workers are much less likely to be covered by a pension plan thanmiddle aged and older workers. Coverage rates rise steadily from 21 percent for those under age25 to about 60 percent for those between ages 40 and 60 before falling off somewhat. Thispattern holds for both men and women. However, the increase in coverage for middle aged menis slightly larger than the increase for middle aged women (see Table 6).

	Higher paying jobs are more likely to offer pensions. Just 8 percent of full-time privatewage and salary workers earning less than $10,000 per year in 1993 were covered under anemployer-sponsored plan compared to 81 percent of those earning $50,000 or more (see Table7). Coverage may be higher for higher paying jobs because of the greater value of the pension taxbenefits to workers in higher tax brackets and because of the declining replacement rate of SocialSecurity at higher earnings levels.

**Table 5.
**Table 6.
**Table 7.
	Significant differences in coverage also are apparent between full-time private wage andsalary workers and other wage and salary workers. Coverage is much lower among part-timeworkers and much higher among public employees. Among part-time, private wage and salaryworkers, 12 percent are covered. Seventy-seven percent of public sector wage and salary workersare covered including 85 percent of those who are full-time workers (see Table 8).

**Table 8.
	Coverage is much lower for smaller firms. Smaller firms are less likely to offercomprehensive fringe benefit packages as part of total compensation. Only 13 percent offull-time private wage and salary workers in firms with fewer than 10 employees are covered.The rate rises with employer size but does not reach 50 percent (the average across all firm sizes)until firms have 100 or more employees.  (See Table 9)

**Table 9.
	The data above report pension coverage of individuals.  When assessing the effectivenessof pensions in providing retirement income, it is more relevant to think of pension coverage ofhouseholds.  Thus, if both the husband and wife work and only the wife accrues pension benefits,the tables above would record that 50 percent of individuals are covered by a pension.  However,in this example, 100 percent of the households (the married couple) receive pension retirementbenefits.  A recent study highlights the importance of this distinction.  It found that in 1992, halfof all individuals aged 51 to 61, that, is on the verge of retirement, had rights to a pension from acurrent or prior job, but two-thirds of all households with at least one member aged 51 to 61 hadvested rights to a pension from a current or prior job.(60)

Trends in pension coverage.-- At the outset of World War II, private employer pensionswere offered by about 12,000 firms. Pensions spread rapidly during and after the war,encouraged by high marginal tax rates and wartime wage controls that exempted pensionbenefits. By 1972, when the first comprehensive survey was undertaken, 48 percent of full-timeprivate employees were covered. Subsequent surveys found that coverage reached 50 percent in1979, but by 1983 had fallen back to 48 percent. The decline continued in the 1980s, reaching 46percent in 1988.(61)  By 1993, coverage had returned to 50 percent.

	The decline in coverage in the 1980s was concentrated among younger men. Thecoverage rate among older men has fallen less dramatically, and among women it has risen atsome ages and fallen at others.

	The decline in pension coverage has occurred at the same time that employers have beenshifting from defined benefit plans. Defined benefit plans provided basic plan coverage for 87percent of private wage and salary workers in 1975.(62)  This proportion dropped to 83 percent by1980 and to 71 percent by 1985. This shifting composition has largely been the result of rapidgrowth in primary defined contribution plans. Employee stock ownership plans and 401(k) planshave been among the most rapidly growing defined contribution plans.

	Figures 2 and 3 show the net acquisition of assets by defined benefit and definedcontribution plans for the period 1986 through 1997.  Figure 2 shows that there has been little netacquisition of assets by defined benefit plans over the past 12 years.  Three factors may haveproduced this outcome.  First, as mentioned above, a number of employers have been shiftingfrom defined benefit plans to defined contribution plans, thus halting contributions to definedbenefit plans and, in some cases, transferring benefits from defined benefit plans to definedcontribution plans.  Second, because defined benefit plans generally have been in place longer,more of these plans have a significant number of beneficiaries receiving payouts from the plans. Payouts necessitate liquidation of some plan assets.  Third, in recent years increases in themarket value of equities may have caused plan funding levels to rise, necessitating smallercontributions to satisfy projected funding requirements.  As Figure 3 shows, defined contributionplans have been accumulating assets in consistently greater amounts over the past 12 years. Some of the asset growth results from transfers from defined benefit plans and some is a result ofthe youth of the plans resulting in the plans covering few individuals who are presently retired,with most of the plan participants being in the accumulation phase.

**Figure 2
**Figure 3
	Figures 4 and 5 utilize data from the Federal Reserve Board's Flow of Funds Accounts toshow the value of assets accumulated in defined benefit and defined contribution pension plans. At the end of 1997, the value of assets in each type of plan was equal to approximately $1.8trillion.  The figures also document the rapid accumulation in assets in defined contribution planscompared to that of defined benefit plans over the past 10 years.

**Figure 4
**Figures 5
**Personal saving**

Aggregate saving.--Although coverage by pensions and Social Security is expected to behigher for current workers than it is for current retirees, the saving rate of current workers may belower than the rate at which current retirees saved during their working lives. This would implythat although two sources of retirement income, Social Security and pension benefits, areexpected to be higher for current workers, another source, income from savings, may be lower.

	The measure of personal saving used in the National Income and Product Accountsattributes all corporate pension contributions and earnings to the household sector.(63) Thus, theincreased pension coverage is already included in the measure of household saving. Tables 10and 11 and Figure 6, show that personal saving has been declining over the past 15 years. Privatesaving, which includes the saving of business, and which may provide a better measure of totalhouseholds saving since businesses are ultimately owned by household, exhibits the samedownward trend. Thus, the saving of the current generation of workers for their retirement seemsto be low relative to the past.  On the other hand, the National Income and Product Accountsmeasures of saving measure only cash flows not consumed.  The purpose of saving for retirementis to accumulate wealth which can be drawn upon in retirement.  If, as in the past few years, themarket value of assets increases, adequate wealth accumulation may be attained with relativelylow saving rates.

**Table 10.
**Table 11.
**Figure 6
Retirement saving of individuals.--It is difficult to determine how much saving outside ofqualified plans is "retirement saving."  Contributions to IRAs represent one measure of such non-pension plan retirement saving.  Assets within IRAs have grown substantially over the past 10years.  Figure 7 below shows that IRA balances, approximately $1.6 trillion in 1996, are nearlyequal in size to the asset balances in both defined benefit and defined contribution plans. (SeeFigures 4 and 5 above.)

	The growth of these balances is impressive in its magnitude, particularly given therelatively modest contributions of recent years.  Table 12, below, reports IRA contributionsbetween 1979 and 1996.  Deductible IRAs have been very popular with taxpayers. As Table 12reports, contributions to IRAs increased significantly when eligibility restrictions wereeliminated in 1982. At the peak in 1985, over $38 billion was contributed to IRAs. Thisrepresented almost 20 percent of personal saving for that year.

	In addition to annual contributions, the current value of IRA balances, as reported inFigure 7, is comprised of balances rolled over into IRAs from qualified plans and increases in themarket value of IRA investments.

**Figure 7
**Table 12.
	As with pension coverage, IRA coverage is not universal.  Tables 13 and 14 summarizeinformation on IRA participation in 1985 and 1996.  Some have expressed concern about thedistribution of taxpayers who contribute to IRAs.  The concern is two-fold.  First, unequalparticipation may lead to some taxpayers having accumulated substantial wealth for retirementwhile other taxpayers have accumulated little wealth.  Second, because IRA contributions receivepreferential tax treatment, the distribution of the tax expenditure may be viewed as inequitable.In 1985, 71 percent of all returns reporting IRA contributions had adjusted gross income ("AGI")below $50,000, and 29 percent had AGI of $50,000 or above. However, taxpayers with AGI of$50,000 or above represented only 8 percent of all returns eligible for IRAs. Thus, althoughmany lower-income individuals contributed to IRAs, most did not, whereas most taxpayers withAGI of $50,000 or above did contribute when eligible. Taxpayers with AGI of $50,000 or abovewere more than four times as likely to contribute to an IRA than were taxpayers with AGI below$50,000--61.8 percent of eligible returns with AGI of $50,000 or above reported contributions toan IRA, while only 13.8 percent of eligible returns with AGI below $50,000 reported IRAcontributions. On the other hand, the data for 1985 or 1996 represent one-year snapshots of IRAcontributions.  If the earning power of young individuals increases over time, an individual whodid not contribute to an IRA when earning $20,000 per year may later contribute when earning$40,000 per year.

	Higher income taxpayers made larger contributions as well. Taxpayers with AGI of$50,000 or more constituted approximately 29 percent of all IRA contributors in 1985, butaccounted for more than 35 percent of IRA contributions. In 1996, taxpayers with AGI of$50,000 or more constituted approximately 25 percent of all IRA contributors, but accounted forapproximately 34 percent of IRA contributions. 

	Because the value of the IRA is the effective exemption of the earnings from tax, thehigher a taxpayer's marginal tax rate, the more valuable the ability to invest through an IRA.Because people in higher income classes generally have higher tax rates, the value of their IRA islarger than the value of IRAs for taxpayers in lower income classes. However, the value of theIRA depends on tax rates throughout the period the IRA is held, and not just the marginal tax ratein the year the contribution is made.

**Table 13.
**Table 14.
	It is too soon to assess the effects that the Taxpayer Relief Act of 1997 may have on IRAparticipation and retirement asset accumulation.  Tables 15a and 15b, below, present the JointCommittee on Taxation staff estimates of the eligibility of taxpayers to make deductible IRAcontributions under present law for 1999.  The percentage of taxpayers eligible to make deductibleIRA contributions differs modestly by filing status.  Among married couples filing joint returns, 58percent are eligible for up to a $4,000 deductible contribution, an additional 15 percent are eligiblefor up to a $2,000 deductible contribution, and approximately 20 percent are ineligible to make adeductible contribution.  Among single filers and head of household filers, only 14 percent areineligible to make a deductible contribution.  

**Table 15a.
**Table 15b.
Other authors have noted that even the taxpayers with low income who did contribute toIRAs owned more financial assets than other low-income taxpayers and that, therefore, IRAcontributors may not be representative of taxpayers in general. Table 16 presents information onthe assets of households with IRAs compared to the assets of households without IRAs.  For eachincome category, the table reports the gross financial asset holdings and non-retirement assetholdings of the median (50th percentile) household.(64)  As the table details, families with IRAshave larger holdings of financial assets than do families without IRAs.  However, it is also thecase that families with IRAs have larger holdings of financial assets than do families withoutIRAs even when all IRA and pension assets are excluded.  Part of the reason that IRAcontributors have larger holdings of assets than noncontributors is that contributors to IRAs tendto be older than noncontributors, and older taxpayers have been accumulating assets longer.

**TABLE 16.
Estimates of saving rate adequacy.--The Congressional Budget Office ("CBO") reportedthat while the saving rate of current workers appears low relative to the past, this may not implythat the level of savings is inadequate for retirement. That CBO study concludes that theso-called "baby boom" generation appears to be accumulating assets at a rate equivalent to thatof their parents who are currently retired. The CBO concludes that the continued increase in realwages, the fact that baby boomers are more highly educated than their parents, and the increasedparticipation of women in the labor force portend "increases in household incomes of babyboomers in retirement."(65)  Some have criticized the conclusion of this study as too optimistic.Critiques note that finding that baby boomers have accumulated approximately the same amountof assets as their parents at a similar age does not bode well for retirement income. Having thesame amount of assets would imply only the potential for the same amount of income asexperienced by current retirees, and as incomes grow this would imply future retirees would beless well off compared to the rest of society than are current retirees. Critics also note that currentretirees benefitted from increases in Social Security benefits and unexpected capital gains onhousing that the baby boomers may not reasonably expect to experience.(66)  All studies of thisquestion have emphasized the important differences within the so-called baby boom generation. Most studies note that those with the least education appear to be least well prepared forretirement in terms of accumulating private assets.  Some studies suggest that the first cohort(i.e., those born 1946-1950) of the baby boom generation is likely to be better prepared forretirement than the last cohort (i.e., those born 1960-1964) of the baby boom generation.(67)

**C.  Increased Retirement Costs**

Finally, it is possible that the need for retirement income is increasing over time.Increases in life expectancies and trends toward earlier retirement increase the number of years inretirement and therefore increase the need for saving. Furthermore, the normal retirement age forSocial Security was changed in 1983. For those born in 1937 or earlier, the normal retirement ageis 65 years old.  Thus, in 1999, the normal retirement for Social Security (the age at whichretirees receive full benefits) is 65.  For those individuals born in 1960 or later, the normalretirement age is 67 years old.  That is, by 2027, the normal retirement age will be 67 years. Ifthe increase in the normal retirement age means that individuals will be working more years, thencurrent saving need not adjust. However, if the historical trend toward earlier retirementcontinues, then the increase in normal retirement age for receipt of full Social Security benefitsmeans that individuals should increase their retirement saving.

Similarly, increased life expectancies and rapid medical cost inflation increase theprobability of large medical expenses. Out-of-pocket medical expenditures for the elderly havebeen steadily increasing over the last 15 years. Also, many people have noted that the probabilityof an individual requiring long-term care some time in their lifetime has been increasing.

**VI.  BACKGROUND INFORMATION RELATING TO INTERNATIONAL EXPERIENCE WITH ALTERNATIVES TO PAY-AS-YOU-GO FINANCING OF SOCIAL SECURITY
**A.  Developed Countries**

**1.  United Kingdom(68)**

The British social security system is comprised of two tiers.  The first tier consists of a"Basic State Pension."  The basic state pension does not depend upon the beneficiary's earninghistory.  Instead it is set at an amount estimated to be somewhat above a subsistence level.  In1997, the weekly value of the basic state pension was approximately $100.(69)  To qualify for thefull basic state pension, the beneficiary must have worked, and paid payroll taxes, for 90 percentof their working lives.  Workers failing to exceed the 90 percent threshold receive aproportionately reduced basic state pension.  Since 1975, a proportional payroll tax has fundedthe benefits paid under the basic state pension.

The second tier of the British social security system is the "state earnings related pensionscheme" ("SERPS").  A worker's earnings determine the SERPS benefit.  Workers may chooseto receive their SERPS benefit from the government's SERPS plan or by "contracting out" toparticipate in a qualified employer pension plan or an individual retirement savings account.

The government's SERPS benefit is based on the beneficiary's weekly earnings.  There isa lower weekly earnings limit below which the employee accrues no benefits.  There also is anupper weekly earnings limit above which the employee accrues no additional benefits.  Employees pay two percent of earnings up to the lower earnings limit and 10 percent of earningsbetween the lower and upper earnings limits.  Employers also must make earnings-relatedcontributions to the National Insurance Fund at rates that rise from three to 10 percent and arenot capped.(70)

A worker may elect to be covered under an approved company plan in lieu of thegovernment's plan.  The company plan may be either a defined benefit plan which offers benefitscomparable to the government SERPS benefit, or a defined contribution plan.  Employer andemployee contributions to the qualified company plans depend upon the design of the particularplan.  Employees and employers who elect company plans receive a rebate on part of theirpayroll tax payments.  Currently, employees receive a rebate equal to 1.6 percent of theirearnings between the lower and upper limits.  Employers receive a rebate of three percent onwages between the lower and upper limits.

A worker who is not enrolled in a company plan may elect to establish an "appropriatepersonal pension" plan and elect out of the government's SERPS benefit.  The employeeestablishes such plans through a financial service provider.  The employee must pay all regularpayroll tax liabilities throughout the year, but at the end of the fiscal year the government paysover a rebate to the employee's appropriate personal pension.

Prior to the mid-1970s, the British social security system consisted solely of the basicstate pension and was funded by annual lump sum contributions by both the employee and theemployer.  In addition, payments to beneficiaries also were funded by general revenues.

**2.  Australia(71)**

The social security system in Australia is comprised of two tiers.  The first tier is calledthe "age pension" benefit and the second tier is called the "superannuation guarantee."

The "age pension" benefit is unrelated to the beneficiary's earnings history.  Anindividual qualifies based on age, residency, assets, and income.  The full age pension benefitequals 25 percent of male average weekly earnings and was worth approximately $100 per weekin 1997.  The age pension benefit is reduced for asset holdings in excess of specified limits andfor income earned beyond specified limits.

The "superannuation guarantee" mandates employer contributions to employer-providedpension funds.  These pension funds generally are defined contribution plans, although somedefined benefit plans remain in place.(72)  Generally, the employer chooses a mutual fund tomanage the investments.  The current contribution rate equals seven percent of eligible wages. Under present law, the contribution rate will rise to nine percent of eligible wages in 2002. Employers do not have to make contributions for employees who earn less than $267 per month.Workers with earnings between $267 and $534 per month may elect to receive higher wages inlieu of superannuation contributions.(73)  Further, contributions are not required for earnings inexcess of approximately $56,000 per year.  Contributions are immediately vested and portable.  In addition to employer contributions, an employee may make a supplemental contribution to hisor her superannuation fund and claim a 7.5 percent tax credit against his or her income taxliability.  Self-employed persons are not covered under the superannuation guarantee mandate.

Prior to the creation of the current social security system, Australia provided only themeans-tested "age pension" financed from general revenues.

**3.  Sweden**(74)

In 1994, the Swedish parliament enacted changes to the Swedish social security systemthat would go into effect in 1999 with the first payouts under the new system to occur in 2001. The reformed system is comprised of two basic parts: an "income pension" and a "guaranteepension."  The income pension will be funded by an 18.5-percent payroll tax on all wages,divided equally between the employee and the employer (9.25 percent on each).  The guaranteepension is to be funded from general government revenues.  The guarantee pension is a means-tested benefit, payable beginning at age 65.  The benefit is equal to approximately 40 percent ofthe average wage of a blue collar employee.

The income pension is comprised of two parts.  First, 16 percent of earnings are creditedto an individual's account.  However, this account is notional only.  The "earnings" on thisaccount are determined by real wage growth per capita in Sweden.  There is no actual investmentof notional accounts.  The proceeds of this portion of the payroll tax are used to fund retirementbenefits of current retirees.  The individual may claim retirement benefits based upon his or hernotional account balance at any time after age 61.  The retirement benefit is calculated as anannuitized value of the account balance.  However, the annuitized value is not a market-basedannuity, but rather guarantees a real 1.6 percent annual return.

The remaining 2.5 percent of earnings collected by the payroll tax is contributed to anindividual account that permits self-directed investments in registered investment funds.  Theindividual can choose among domestic and foreign investment funds.(75)  The investment funds donot manage numerous individual accounts.  Rather, a government agency stands as intermediarybetween the individual and the investment funds, collecting the payroll taxes and investing lumpsums in the various funds on behalf of numerous individuals.(76)  The government agency providesthe record keeping and reporting to the individual investors, as well as being the sole provider ofannuities to individuals when they choose to take their retirement benefits.  The individual mayclaim retirement benefits based upon his or her actual account balance at any time after age 61. The retirement benefit is determined by converting the account balance to a standard, market-based annuity.

Prior to the reforms, retirement pensions provided under the Swedish social securitysystem consisted of two basic components: a national basic pension and a supplementarypension.  All Swedish citizens and residents were entitled to the national basic pension,regardless of earnings.  The payment received was determined relative to a "basic amount," set at$4,907 in 1995.  A single person received 96 percent of the basic amount ($4,710 in 1995) andmarried persons each received 78.5 percent of the basic amount ($7,704 per married couple in1995).  The supplementary pension benefit depended upon the individual's earnings history.  Themaximum total pension benefit from both the national basic pension and the supplementarypension was $23,847 in 1995.

Employer contributions on all wages financed the Swedish social security system.  In1994, a payroll tax rate of 5.86 percent funded the national basic pension and a payroll tax rate of13 percent funded the supplementary pension.(77)  In addition to the payroll tax, general taxrevenues supplemented the funding for the basic national pension.  The payroll tax to fund thepre-2001 supplementary pension benefits has accumulated surpluses which have been investedpredominantly in government bonds and housing bonds.  However, since 1974, 15 percent of theaccumulated surplus has been invested in domestic and foreign equities.

**B.  Newly Industrialized Countries**

******1.  Chile**(78)

The Chilean social security system mandates that employees contribute 10 percent oftheir qualified wages to a personal account managed by a qualified financial institution of theirchoosing.  There is no employer contribution.  An additional 3 percent of qualified wages isdeducted to cover the administrative costs of the plan and to provide disability and survivor'sinsurance.(79)  Qualified wages consists of all wages up to approximately $24,000 annually.  Inaddition to the mandatory contributions, employees can make supplemental contributions to theiraccounts tax free, subject to an annual limitation.  Self-employed workers are not required toparticipate, but they may voluntarily set up retirement accounts subject to the same regulations.

The financial institutions which maintain the individual accounts and the investment mix chosen by the managers are regulated by the government.  Upon retirement, a beneficiary mustpurchase an indexed annuity or receive regulated periodic withdrawals.  The Chilean systemguarantees a minimum pension currently equal to approximately 75 percent of the prevailingminimum wage.  For workers who have contributed to the system for at least 20 years and whoseaccumulated balances are insufficient to generate a pension equal to the minimum guaranteedpension, the government uses general revenues to fund the difference between the worker'saccumulated balance and the amount necessary to fund the guaranteed minimum pension.

Prior to 1980, Chile financed social security on a pay-as-you-go basis.  Employees andemployers paid payroll taxes to a handful of institutions organized by occupational category. The payroll tax rates on employers generally were larger than those on employees.  The systemdid not achieve universal coverage.  Self-employed and informal sector workers, who comprise25 percent or more of the Chilean labor force, were not covered by the system.(80)

**2.  Mexico**(81)

The Mexican social security system mandates that all workers hold two old-age savingsaccounts, one with a private pension company or with a government administered fund and thesecond account with the publicly run housing fund (the *Instituto del Fondo Nacional de laVivienda de los Trabajaderos*).  Contributions equal to 6.5 percent of taxable wages are paid toindividual old-age accounts and contributions equal to 5 percent of taxable wages are paid to thehousing fund.(82)  Payroll taxes on the employer and the employee and government contributionsfunded from general revenues finance these contributions.  A payroll tax at a rate of 5.15 percenton employers and at a rate of 1.125 percent on employees is dedicated to the old age account. The government contributes an amount equal to 0.225 percent of an employee's taxable wages tothe old age account.  In addition, the government contributes an amount equal 5.5 percent of theprevailing minimum wage to each retirement account.  Contributions to the housing fund arefinanced by a 5 percent payroll tax on employers.  The taxable wage base includes all wages paidup to a value equal to 25 times the prevailing minimum wage.

Each private pension company currently offers one mutual fund.  In the future,individuals will be able to choose among multiple mutual funds from the various private pensioncompanies or from the government managed funds.  Monies invested in the housing fund supportmortgage loans to a low-income clientele.  Contributions to both the old age fund and thehousing fund are fully vested.

Upon retirement, a beneficiary must use accumulated balances in both accounts topurchase a private annuity or receive periodic withdrawals from their accounts under a regulatedschedule.  All beneficiaries meeting minimum contribution requirements are guaranteed aminimum pension equal to the Mexico City minimum wage.  In the event a worker'saccumulated  savings are not sufficient to provide a pension equal to the guaranteed minimumpension, the government makes up the difference.

The Mexican social security system does not cover government workers or the selfemployed.  In addition, those employees of Mexico's substantial informal sector, where payrolland other business records are not maintained, do not participate in the social security system.

Prior to 1992, Mexico maintained a pay-as-you-go social security system.  Contributionsequal to 8.5-percent of applicable wages financed old age and other social insurance benefits.  Anemployee's wages up to a maximum amount equal to 10 times the prevailing minimum wagedefined the applicable wage base.  Payroll taxes comprised the bulk of the 8.5-percent. Employers paid 5.95 percent of taxable wages and employees paid 2.125 percent of taxablewages.  In addition, the government, from other funds, contributed an amount equal to 0.425percent of taxable wages to the social security fund.  Covered employees also were required tocontribute to the housing fund, thereby providing partial funding of future benefits.(83)  Pensionbenefits were based on the beneficiaries earnings history.  Under the old social security system,coverage was not universal.  The system did not cover the self-employed, government workers,or employees of PEMEX (the government owned oil company).  In addition, those who workedin Mexico's substantial informal sector generally did not appear on payroll records and wereoutside the system.

**3.  Argentina**(84)

Argentinian social security benefits are determined under a two-tiered structure.  The firsttier of benefits is unrelated to earnings.  The second tier of benefits is provided by either anearnings related defined benefit pension or by the individual's contributions to an individualaccount.  The defined benefit option is a public plan funded on a pay-as-you-go basis.  Once anindividual elects the individual account option, he or she may not later transfer back to thedefined benefit option.

Regardless of whether the employee elects the defined benefit option or the individualaccount option, the employee must contribute 11 percent of covered wages.  Employers alsocontribute.  Between 1993 and 1996, the employer contribution rate was 16 percent of coveredwages.  Since 1996, employers have contributed 12 percent of wages on average.(85)  Self-employed persons contribute the combined employer and employee rates.(86)  Covered wages areall wages up to an amount equal to 60 times the so-called average mandatory provisionalcontribution.  The average mandatory provisional contribution is calculated twice per year bydividing the total contribution of employees by the total number of contributors.  In 1997, theceiling on covered wages was $57,600.

The first tier benefit is available to all workers with 30 years of contributions uponreaching age 64 for men or age 59 for women.(87)  This basic pension benefit is related to theaverage mandatory contribution and was $2,400 per year in 1997.  The benefit amount increasesby one percent for each year beyond 30 for which the beneficiary contributed to the system.

Employees who elect the defined benefit pension for the second tier of their benefitreceive 0.85 percent of their average covered wages earned during their final 10 years ofemployment multiplied by the number of years during which they contributed to the system. However, benefits are limited by a maximum benefit.  The maximum defined benefit pensionamount in 1997 was $960 per year.

Employees who elect the individual account option for their second tier benefit designatetheir 11 percent payroll tax to a retirement account managed by a public agency or by privatefirms.  Upon retirement, the employee uses the accumulated balances to purchase an annuityfrom a private insurance company or received specified periodic payments.  Certain earlywithdrawals are permitted if the accumulated balances are sufficient to provide specified pensionbenefits.

Prior to 1994, Argentina maintained a pay-as-you-go social security system.  Payrolltaxes and other earmarked taxes funded the benefits.  The pension system had two parts.  Onepart covered employees.  The second part covered the self employed.  A unified payroll taxschedule funded both parts, but benefit rules differed.  In 1993, the payroll tax rate was 26percent.  Other revenue also supplemented the payment of benefits when necessary.(88)
**FOOTNOTES**
1.   This document may be cited as follows: Joint Committee on Taxation,*Analysis ofIssues Relating To Social Security Individual Private Accounts*(JCX-14-99), March 15, 1999.
2.   For more discussion, see the W&M Committee Print 105-7, the "1998 Greenbook,"May 19, 1998, which was compiled by the staff of the Committee on Ways and Means, U.S.House of Representatives.
3.   There are certain statutory exceptions from Social Security coverage.  The majority ofthe 6.5 million non-covered workers in 1996 worked for the Federal Government or State orlocal governments.  All Federal employees hired after 1983 are covered under the OASDIprogram.  Prior to July 1, 1991, States and local governments could enter into voluntaryagreements with the Secretary of Health and Human Services which allowed the State or localgovernment or its employees to decide whether to participate in Social Security, participate in apublic retirement plan, or not to participate in any retirement system.  After June 30, 1991,services performed by each employee of a State or local government who is not personallyparticipating in a public retirement plan are mandatorily covered by Social Security.
4.   There is no limit on taxable wages for the hospital insurance ("HI") payroll tax which isimposed in addition to the OASDI payroll tax.
5.   This does not include the payroll tax for HI, which is imposed at a current rate of 1.45percent each on the employee and the employer.
6.   This includes 6.2 percent for the OASDI and 1.45 percent for the HI payroll taxes.
7.   Similar treatment is given to tax liabilities under the hospital insurance HI portion ofthe payroll tax.
8.   Employers are not required to maintain a qualified plan; thus, it is up to the employer todetermine whether to establish a plan and what kind of plan to establish.
9.   Qualified plans are subject to regulation under both the Internal Revenue Code and theEmployee Retirement Income Security Act of 1974, as amended ("ERISA").  Some rules are inboth the Code and ERISA.  Some, such as limits on contributions and nondiscrimination rules,are only in the Code, and some, such as fiduciary, reporting, and disclosure rules, are only inERISA.
10.   Matching contributions and employee after-tax contributions are also subject to aspecial nondiscrimination test.
11.   Under the first schedule, called 5-year cliff vesting, a participant has no vested right tohis or her accrued benefit until he or she has 5 years of service.  After 5 years of service, theparticipant is 100 percent vested.  Under the second schedule, benefits vest over a period of 7years.
12.   Earnings on amounts attributable to employee elective deferrals cannot be distributedon account of hardship.  Employer matching contributions and nonelective contributions made toa section 401(k) plan are not subject to these distribution restrictions unless they are used tosatisfy the special nondiscrimination test applicable to section 401(k) plans.  Such contributionsmay generally be distributed after two years, if the plan so permits.
13.   A more complete description of the TSP can be found in *The Summary of the ThriftSavings Plan for Federal Employees*, prepared by the Federal Retirement Thrift InvestmentBoard; and *The Financial Statements of the Thrift Savings Fund - 1997 and 1996*, prepared byArthur Andersen LLP.
14.   Beginning in the year 2000, two new funds will be added, a small cap index fund, (the"S fund") and an international index fund, (the "I fund").
15.   For a married participant, spouse's rights requirements will apply to the withdrawalchoice.
16.   In some cases, an IRA can be used by an employer as an employer-sponsoredretirement plan.
17.   The AGI phase-out range for married taxpayers filing a joint return is scheduled toincrease so the range will be as follows: for 2000, $52,000 to $62,000; for 2001, $53,000 to$63,000; for 2002, $54,000 to $64,000; for 2003, $60,000 to $70,000; for 2004, $65,000 to$75,000; for 2005, $70,000 to $80,000; for 2006, $75,000 to $85,000; and for 2007 andthereafter, $80,000 to $100,000.  The AGI phase-out range for single taxpayers is scheduled toincrease as follows: for 2000, $32,000 to $42,000; for 2001, $33,000 to $43,000; for 2002,$34,000 to $44,000; for 2003, $40,000 to $50,000; for 2004, $45,000 to $50,000; and for 2005and thereafter, $50,000 to $60,000.
18.   An IRA can also be an individual retirement annuity, as well as an individualretirement account.  Individual retirement annuities provide an annuity.
19.   National Academy of Social Insurance, "Report of the Panel on Privatization of SocialSecurity" (November 1998).
20.   Another issue that may arise under proposals that base contributions on wages andself-employment earnings is how to deal with individuals who have more than one employer orhave both wage income and self-employment income.  This issue arises under present lawbecause there is a cap on Social Security earnings.
21.   Under present law, payroll taxes and receipts are not reconciled on an individual basis.
22.   Note that depending on the IPA system adopted, transferring actual funds to the IPAmay not be required.  Rather, the IPA could be a bookkeeping account to which contributions(and appropriate earnings) are credited.
23.   An appropriate starting point for crediting of investment earnings would need be to bedetermined.  For example, one approach would be to credit earnings as if contributions had beenmade on a monthly basis based on monthly wages.  Such an approach might require moreinformation regarding wages and self-employment earnings than is currently provided to SSA.
24.   Employers currently provide quarterly information regarding employment taxes onForm 941.  However, this information is provided on an aggregate basis, not an individual basis.
25.   This issue is discussed further in Part IV.B.3., below.
26.   As mentioned previously, this discussion assumes mandatory contributions to privateaccounts.  To the extent contributing is voluntary, permitting preretirement access could alsoinduce some individuals to contribute to the account (or to contribute more to the account). Some individuals who may be concerned that they will need funds before retirement may bereluctant to place funds in an account that cannot be accessed in case of emergencies.
27.   This issue is a subset of the issue relating to how a guaranteed benefit may affectinvestment decisions, which is discussed in Part IV.B.4., below.
28.   Policy implications of the tax treatment of distributions is discussed below in PartIV.B.
29.   It should be noted that couples living in States governed by community property lawsmay be subject to different rules.
30.   See, for example, Martin Feldstein, "Savings Grace," *The New Republic*, April 6,1998.
31.    Available evidence shows that the investment mix in private defined contributionplans in which individuals direct their own investments is 40 percent equities, 15 percent bonds,and 45 percent cash and other assets, including real estate (see *Employee Benefits ResearchInstitute Databook*, 4th edition, 1997, p. 102).
32.   Such costs could also include sales costs and a return on capital for any private insureroffering the annuities.  Such costs could result in substantial reductions in the reported annualannuity payments.  For a discussion of these issues, see James Porterba and Mark Warshawsky,"The Costs of Annuitizing Retirement Payouts from Individual Accounts,"  National Bureau ofEconomic Research, Working Paper 6918, January 1999.
33.   Life expectancy estimate based on life expectancy tables of IRS Publication 590.
34.    See the discussion in Part II. B and D., above.
35.   While this constraint may be relaxed somewhat by inflows of foreign capital, it wouldusually require an increase in interest rates to attract this capital.  Such rising interest rates(borrowing costs) would mean that some investments that would otherwise be made will not bemade.  Additionally, to the extent investments are financed from foreign capital, the returns tocapital from such investments will flow abroad.
36.   This issue is similar to the debate as to whether the tax incentives for IRAcontributions have contributed to increased personal saving, or whether individuals have largelyshifted other forms of saving into IRAs.  See Joint Committee on Taxation *Description AndAnalysis Of Tax Proposals Relating To Individual Saving And IRAs* (JCS-2-97), March 3, 1997,for a discussion of these issues.
37.   It is possible that some individuals would choose to offset non-IPA saving by morethan a dollar for each dollar of IPA contributions.  For this to be rational, the individual wouldhave to be a "target" saver--that is, a saver who seeks to accumulate a given dollar amount ofsaving at some future point for a specific purpose (such as buying a car, or retirement)--and theIPA would have to be more tax favored than at least some of the other forms of saving that thetarget saver undertakes. If the IPA is more tax favored than some non-IPA accounts, a targetsaver would offset less tax-favored saving by more than a dollar for each dollar in the IPA, asfewer IPA dollars would be necessary to achieve the future target as a result of the advantages oftax deferral.  For further discussion of target saving, see Andrew Samwick, "Tax Reform andTarget Saving," *National Tax Journal*, Volume LI, No. 3, September 1998.
38.   A tax system is considered to be progressive if average tax rates rise with income. Similarly, a benefit system is progressive if benefits increase as a share of income as incomefalls.
39.   To see this, consider an economy represented by one person with $100 in wage incomein his or her working life, on which $20 is paid in taxes to finance the only government service--a future retirement benefit.  The taxpayer thus has $80 in after-tax income at his or her disposalto either consume during his or her working life or to save a portion to supplement retirementincome.  If a new tax of $2 is imposed and deposited to an IPA in the taxpayer's name to payretirement benefits, the taxpayer would now have only $78 in after-tax income at his or herdisposal to consume during his or her working life.  Alternatively, a mandate that the taxpayerfund such an IPA from his or her $80 in after-tax disposable income would leave $78 indisposable income during the taxpayer's working life, and $2 in the taxpayer's IPA.  Hence, thetwo approaches are equivalent.
40.   To the extent that all workers have account contributions, the contributions cannotrepresent transfers for all taxpayers, as at least some must bear the burden of the taxes.
41.   The contribution to a Roth IRA is chosen to simplify the example--the decision to savein any form could supplement retirement income.
42.   This can be thought of equally as either a requirement that he contribute $2, or that histaxes are raised by $2 and the $2 is returned to him to fund the IPA.
43.   The Vanguard Group, the operator of the largest S&P 500 stock  index fund, reports aportfolio expense ratio (the ration of expenses to assets under management) of .19 percent for theyear ended December 31, 1997.   By contrast, according to Lipper, Inc., which tracks theperformance of the mutual fund industry, the average growth equity fund had an expense ratio of1.53 percent for the year ended December 31, 1997.
44.  In general, from society's perspective as a whole, it is best that the investments with thehighest expected return be undertaken. If people are on average risk averse, however, certainhigh expected value, but high risk investments, will not be undertaken in favor of safer, lowerreturn investments.  Thus, it could be argued that the government should subsidize the risktaking.  However, if the government takes too great a share of the downside risk, or too little ashare of the upside gain through taxes (relative to the share of downside risk), it could encouragerisk taking that is not expected to produce, for society as a whole, a greater return than less riskyinvestment.  Such an incentive would be detrimental to long term growth. 
45.   In general, risk is defined as the variance in an asset's return about it's expected return. Thus, for two assets that are expected to produce a 10 percent return on average, the asset whosereturn generally falls between eight percent and 12 percent would be less risky than the assetwhose return could be as low as zero or as high as twenty percent, though both are expected toreturn 10 percent on average.
46.   Calculations by staff of the Joint Committee on Taxation based on Social SecurityAdministration, *Annual Statistical Supplement to the Social Security Bulletin, 1998*, November1998, Table 3.E.3.
47. *Statistical Abstract of The United States 1997*, Table 1200, p. 725. 
48. *Statistical Abstract of The United States 1997*, Table 780, p. 513. 
49.   Social Security benefit recipients with modified adjusted gross income exceedingcertain limits are required to include up to 85 percent of their benefits in income. The JointCommittee on Taxation staff projects that, in 1999, 33 percent of all elderly will include someportion of Social Security benefits in taxable income.
50.   Earnings are indexed by the rate of wage growth. Highest career earnings are definedas the average of the highest five years of earnings. 
51.   This measure is calculated only for those individuals who worked a significant amountduring the five years preceding retirement.
52.   Susan Grad, "Earnings Replacement Rates of New Retired Workers," *Social SecurityBulletin*, 53, October 1990.
53.   Alan L. Gustman and Thomas L. Steinmeiner, "Effects of Pensions on Savings:Analysis with Data from the Health and Retirement Study."  National Bureau of EconomicResearch, Working Paper #6681, August 1998.  Replacement rates in this study are measuredrelative to pre-retirement earnings of the household.
54.   The reported replacement rates measured replacement income in terms of nominaldollars.  If the calculation were to account for future inflation, the authors estimated that real(inflation adjusted) replacement rates averaged 60 percent across all of the households in thesample and 66 percent of the real value of the pre-retirement earnings for the median 10 percentof households.  See, Gustman and Steinmeier, "Effects of Pensions on Savings," pp. 18-19.
55.   James F. Moore and Olivia S. Mitchell, "Projected Retirement Wealth and SavingsAdequacy in the Health and Retirement Study," National Bureau of Economic Research,Working Paper # 6240, October 1997.  Moore and Mitchell estimate that the necessary savingrate falls to 7 percent per year if the household would defer retirement until age 65.  Moore andMitchell measure "pre-retirement consumption" by reference to replacement rates of less than100 percent.  Thus, if a 100-percent replacement rate were the goal, an even greater saving ratewould be necessary.
56.   Social Security Administration, *Annual Statistical Supplement to the Social SecurityBulletin, 1998, November 1998*, Table 3.E.2.
57.   For a discussion of the legislative history of Social Security coverage, see Committeeon Ways and Means, *1998 Green Book* (WMCP 105-7), May 19, 1998, pp. 6-11.
58. *EBRI Databook on Employee Benefits*, Fourth Edition 1997.  Table 10.2 on page 84reports that in 1975, 31 million employees were participants in private sector pension plans.  By1993 this number had expanded to 45 million employees.  Among all civilian workers, thepercentage participating in a pension plan has grown from 44 percent in 1979 to 51 percent in1993 (Table 10.4, p. 86).
59.   Some private-sector employees contribute to 403(b) tax-sheltered annuities instead of401(k) plans.
60.   Gustman and Steinmeier, "Effects of Pensions on Savings," pp. 8-9.
61.   J.R. Woods, "Pension Coverage Among Private Wage and Salary Workers:Preliminary Findings from the 1988 Survey of Employee Benefits," *Social Security Bulletin*, 52,p.17.
62.   J.A. Turner and D. Beller, *Trends in Pensions* (Washington, D.C.: U.S. Department ofLabor), 1989, pp. 65 and 357.
63.   National saving is generally divided into private saving and public saving. Privatesaving is comprised of household or personal saving and business saving. (See Table 10)Households save by not spending all of their disposable income (i.e., after-tax income). In Tables10 and 11, personal saving is measured as the difference between household income andhousehold consumption. In addition, the National Income and Product Accounts attribute allcorporate pension contributions and earnings on accumulated pension balances as saving by thehousehold sector and, hence, part of personal saving.  Personal saving does not include changesin values of household assets, such as have occurred over the past few years as stock marketvalues have increased. Businesses save by retaining some of their earnings. Table 10 presents netsaving, which equals gross saving less capital consumption (depreciation). Public saving reflectsthe extent to which the Federal, State, and local governments run budget surpluses or deficits.The National Income and Product Accounts also adjust government surpluses for depreciation ofgovernment assets. Hence, public saving, like business saving, is measured as net saving. Table10 presents data on the components of net national saving in the United States.
64.   "Gross financial assets" reports only the "asset side" of the family's balance sheet. That is, these figures do not net out the value of any of the family's financial liabilities such asmortgage or consumer debt.  "Gross financial assets less retirement assets" subtracts IRA anddefined contribution plan asset balances from reported gross financial assets.  Neither figureincludes a calculation of the value of any accrued defined benefit pension plan benefits.
65.   Congressional Budget Office, "Baby Boomers in Retirement: An Early Perspective,"September 1993, p. xiv. Also see, Joyce Manchester, "Baby Boomers in Retirement: An EarlyPerspective," in Dallas Salisbury and Nora Super Jones (eds.), *Retirement in the 21st Century:Ready or Not?* (Washington: Employee Benefits Research Institute), 1994. 
66.   B. Douglas Bernheim, "Adequacy of Savings for Retirement and the Role ofEconomic Literacy," in Dallas Salibury and Nora Super Jones (eds.), *Retirement in the 21stCentury: Ready or Not?* (Washington: Employee Benefits Research Institute), 1994.  Also seeLaurence Kotlikoff and Alan J. Auerbach, "U.S. Fiscal and Savings Crises and Their Impact forBaby Boomers" in the same volume.  Bernheim and Kotlikoff and Auerbach project potentialconsumption paths of baby boomers based on their current accumulation of assets andconsumption behavior.  Both studies conclude that baby boomer saving is, on average,inadequate for that generation to maintain its standard of living in retirement.  Bernheimestimates that, holding constant their participation in qualified plans, baby boomer non-retirement plan saving is at one-third the rate necessary to maintain pre-retirement consumption.
67.   For a brief review of this literature, see Daniel B. Radner, "The Retirement Prospectsof the Baby Boom Generation," *Social Security Bulletin*, 61, 1998, pp. 3-19.
68.   Congressional Budget Office, *Social Security Privatization: Experiences Abroad*,January 1999.  Also see Richard Disney, "The United Kingdom's Pension Program," in StevenA. Sass and Robert K. Triest, eds., *Social Security Reform Conference Proceedings: Links toSaving, Investment and Growth*, (Boston: Federal Reserve Bank of Boston), 1997, pp. 157-167,Richard Blundell and Paul Johnson, "Pensions and Retirement in the UK," National Bureau ofEconomic Research Working Paper #6154, September 1997, and Alan Budd and NigelCampbell, "The Roles of the Public and Private Sectors in the U.K. Pension System," in MartinFeldstein, (ed.), *Privatizing Social Security*, (Chicago: University of Chicago Press), 1998.
69.   All figures in this section are expressed in U.S. dollars for comparison purposes.
70.   There is a separate formula for self-employed persons who choose the government'sSERPS benefit.
71.   CBO, *Social Security Privatization*.  Also see Malcolm L. Edey, "Retirement IncomePolicy in Australia," in Steven A. Sass and Robert K. Triest, (eds.), *Social Security ReformConference Proceedings: Links to Saving, Investment and Growth*, (Boston: Federal ReserveBank of Boston), 1997, pp. 168-173, Malcolm Edey and John Simon, "Australia's RetirementIncome System: Implications for Saving and Capital Markets," National Bureau of EconomicResearch Working Paper #5799, October 1996, and Malcolm Edey and John Simon, "Australia'sRetirement Income System," in Martin Feldstein, (ed.), *Privatizing Social Security*, (Chicago:University of Chicago Press), 1998.
72.   Prior to a series of policy changes beginning in 1986 mandating coverage and thecurrent system, many employers and governments offered employees pension benefits throughdefined benefit plans.  Many of these older plans remain in place.  Newly adopted plansgenerally have been defined contribution plans.  See, Edey, "Retirement Income Policy inAustralia," p. 169.
73.   Commonwealth Treasury of Australia, *1997-98 Budget Paper No.2: Budget Measures1997-98* (Canberra: Australian Government Publishing Service, 1997), pp. 191-192.
74.   See Mårten Palme and Ingemar Svensson, " Social Security, Occupational Pensions,and Retirement in Sweden," National Bureau of Economic Research Working Paper #6137,August 1997, and Annika Sundén, "The Swedish Pension Reform," xerox, Federal ReserveBoard of Governors, September 1998.
75.   In addition, the government will manage an investment fund for those individuals whodo not wish their funds to be managed by private investment funds.
76.   The government agency will hold individual contributions for up to 18 months whileindividual earnings records are reconciled.  During this period the agency will invest the funds inshort term investments such as government notes and credit individual accounts with interestincome. 
77.   In addition employers pay a payroll tax rate of 0.2 percent to finance pension benefitsof part-time workers.
78.   CBO, *Social Security Privatization*.  Also see Julia Lynn Coronado, "The Effects ofSocial Security Privatization on Household Saving: Evidence from the Chilean Experience,"Federal Reserve Board of Governors, Finance and Economics Discussion Series Working Paper,1998-12, Olivia S. Mitchell and Flávio Ataliba Barreto, "After Chile, What?  Second-RoundPension Reforms in Latin America," National Bureau of Economic Research Working Paper#6316, December 1997, and Sebastian Edwards, "The Chilean Pension Reform: A PioneeringProgram," in Martin Feldstein, (ed.), *Privatizing Social Security*, (Chicago: University ofChicago Press), 1998.
79.   Employers pay for worker compensation insurance.
80.   Coronado, "The Effects of Social Security Privatization on Household Saving," p. 5.
81.   CBO, *Social Security Privatization*.  Also see Carolos Sales-Sarrapy, Fernando Solis-Soberón, and Alejandro Villagómez-Amezcua, "Pension System Reform: The Mexican Case," inMartin Feldstein, (ed.), *Privatizing Social Security*, (Chicago: University of Chicago Press),1998, Agustin G. Carstens, "The Reform of Social Security in Mexico," in Steven A. Sass andRobert K. Triest, eds., *Social Security Reform Conference Proceedings: Links to Saving,Investment and Growth*, (Boston: Federal Reserve Bank of Boston), 1997, pp. 153-156, andMitchell and Barreto, "After Chile, What?  Second-Round Pension Reforms in Latin America."
82.   In addition, contributions equal to 4 percent of taxable wages finance disability and lifeinsurance and retiree medical insurance.
83.   Over the past several years, the housing funds has yielded negative returns on itslending activities.
84.   CBO, *Social Security Privatization*.  See. Mitchell and Barreto, "After Chile, What? Second-Round Pension Reforms in Latin America," and Joaquín Cottani and Gustavo Demarco,"The Shift to a Funded Social Security System: The Case of Argentina," in Martin Feldstein,(ed.), *Privatizing Social Security*, (Chicago: University of Chicago Press), 1998.
85.   The employer contribution rate varies by geographic region.
86.   Contributions of self-employed persons are based on the 27-percent rate applied to aschedule of  "reference" or estimated incomes.
87.   The retirement age is scheduled to rise to 65 for men and 60 for women beginning in2001.
88.   In 1993, in addition to payroll tax collections, the social security system received 10percent of VAT receipts, 20 percent of income tax receipts, 100 percent of personal wealth taxreceipts, and 30 percent of revenues from the sale to the public of state enterprises.  Cottani andDemarco, "The Shift to a Funded Social Security System."************************************************************************