MIT Sloan Management Review

President Bush’s Commission to Strengthen Social Security confirmed what thoughtful analysts have known for years: Without substantial reforms, Social Security will not be able to pay the benefits promised to U.S. citizens — at least not without a substantial increase in Social Security taxes, which, of course, would hinder the ability of U.S. businesses and industries to compete.To close the growing funding gap created by the declining ratio of workers to retirees, the CSSS has proposed three solutions, each of which would enable participants to transfer a portion of their Social Security contributions toindividual mutual fund accounts that invest in both stocks and bonds. While, over the long run, this would produce more revenue than the current practice of investing in government bonds, in our opinion, the high costs involved in this approach would substantially reduce future benefits and would not relieve the government of the enormous cost of transitioning from a pay-as-you-go system to a funded system. This would also put pressure on businesses, especially small businesses, to expend resources directing and managing relationships with financial institutions.Critically, the CSSS’s proposals would also abrogate Social Security’s most valuable feature — government-guaranteed retirement benefits (or “defined benefits”).