Funding Social Security deserves serious consideration in the debate over Social Security reform that is taking place in many countries around the world. Funding Social Security is not a new proposal. Its debt to other reform plans for all its components will be clearly evident from citations and quotes.

Funding Social Security has two distinct essential components: fund accumulation and portfolio diversification. Fund accumulation requires setting tax and benefit rates to achieve substantial annual surpluses. Portfolio diversification is achieved by having the Social Security Administration contract with private firms to invest the Social Security trust fund. Thus, funded Social Security uses a mix of payroll taxes and portfolio investment income to finance benefits, with an important share contributed by each source; for example, investment income might roughly equal payroll tax revenue in a typical year. In its portfolio choice, funded Social Security avoids excessive reliance on either government bonds (because the yield is lower) or corporate stocks (because the risk is higher).

With funded Social Security, all investment risk is pooled: there are no individual accounts. The Social Security Administration contracts with private investment firms (under competitive bidding) to manage the portfolio of the Social Security trust fund; each investment firm manages a share of the trust fund portfolio. Under the contract, each firm must invest its share of the fund in a conservative diversified portfolio of government bonds, corporate bonds, and corporate stocks.