Will Pre-Funding Provide Security for Social Security? A Review of the Literature

President Clinton has proposed creating larger social security funds and investing a portion of them in the private sector. Others have suggested more radical reforms such as moving social security from a defined-benefit scheme to a definedcontribution plan based on the Chilean model. These proposals are based on the goal of creating higher investment returns, which would make social security benefits easier to finance in the long run. The important public policy issues inherent in such proposals are numerous: questions of whether pre-funded social security plans are demographically immune; whether pre-funding social security can increase gross national savings and worker productivity; whether there are better ways to create a healthy economy; whether social security is best offered as a defined-benefit plan or a defined-contribution plan. This paper reviews each of these important public policy issues in the context of recent social security policy initiatives in Canada and the United States. After an extensive review of the literature, the paper concludes that greater prefunding of social security will not, of and by itself, create a more secure system.