The shift from a pay-as-you-go Social Security system to one based on Personal Retirement Accounts (PRAs) requires a design that is technically sound, fiscally transparent, and morally coherent. At the center of this transition is the need to convert today’s unfunded promises into explicit, funded obligations, while simultaneously allowing new retirement capital to accumulate for future retirees. The mechanism that achieves this is the pairing of individually owned PRAs with Recognition Bonds (RBs)—government-issued instruments that convert accrued Social Security benefits into a defined, fully accounted-for asset.

The Social Security Administration continues its current operational role throughout the transition. It collects FICA payroll taxes exactly as it does today, and these taxes continue to fund existing retirees and beneficiaries. Nothing in The Plan diverts or reduces FICA inflows. PRA contributions are added on top of existing tax flows, enabling the old system to remain fully financed while the new system grows in parallel. This approach avoids the central flaw of many previous reform attempts: asking workers to simultaneously finance current retirees while trying to accumulate their own retirement savings. Here, the legacy system remains intact until it winds down naturally.

Recognition Bonds (RBs) are issued into a worker’s PRA at the moment of entry. To understand their purpose, one must briefly examine how Social Security calculates benefits today. The system uses a progressive formula based on lifetime earnings, where wages are “indexed” for growth, averaged, and then fed through a structure of bend points. These bend points apply higher replacement rates to lower levels of income and lower replacement rates to income above the thresholds. The result is intentionally progressive: lower-income workers receive a higher proportion of their income in retirement, even though everyone contributes 10.6 percent under the OASD portion of FICA, the remainder of FICA staying exactly as it is today and completely untouched by The Plan. The Plan concerns only OASD.

The RBs are calculated so that workers receive a retirement value that somewhat exceeds what is projected under current law, but the initial RB amounts intentionally represent only the minimum necessary to replace Social Security retirement benefits. Workers are not receiving the full 10.6 percent value at the outset because the introduction of PRAs must not overload the federal balance sheet with new debt. As the transition progresses and the pay-as-you-go system’s net cash flow becomes positive—because fewer retirees remain in the old system and PRA participation expands—RB amounts will be increased. When pay-as-you-go is nearly phased out, workers will receive the full value of their OASD contributions: half compounding in PRAs to produce far larger retirement benefits, and half flowing directly into increased take-home pay and a higher standard of living. Long before today’s young workers retire, they will be receiving the full OASD value into their PRAs; ultimately, the OASD tax itself can be eliminated and replaced with a small mandatory PRA contribution, with the remainder returned to the worker—fueling a stronger, more dynamic economy.

The Plan preserves this progressiveness by mapping the existing Social Security benefit formula into the valuation of Recognition Bonds. Instead of a crude “percentage match,” the RB calculation uses the same lifetime earnings data, the same indexed wage records, and the same bend-point structure that Social Security uses now. A low-income worker who would have received a high replacement rate under the old system receives an RB whose actuarial value reflects that benefit. A higher-income worker receives an RB with a proportionately lower replacement value. This ensures that the shift to PRAs does not disadvantage those who have historically relied most heavily on Social Security’s progressivity.

Once calculated, the Recognition Bond is deposited into the worker’s PRA. It accrues interest at a Treasury-linked rate and remains a government obligation until retirement. Unlike traditional Social Security benefits, which can be changed by legislation, an RB is a defined contractual claim. It converts a vague entitlement into a measurable financial asset.

The question of redemption is central to the system’s functionality. Workers will eventually transition from SSA-administered PRAs to privately managed accounts when their balances reach sufficient scale. At that point, Recognition Bonds must convert into an asset that integrates naturally into a diversified investment portfolio. To accomplish this, RBs are formally defined as redeemable/exchangeable instruments: although they mature at the worker’s statutory retirement age, they may be redeemed or exchanged earlier at the worker’s request without impairing their contractual value.

This can be accomplished by offering workers two structured options.

First, an RB may be redeemed at any time prior to maturity at its full accrued value, with the redemption amount deposited directly into the PRA. The government finances early redemption in the same manner it services or rolls over any federal debt instrument, ensuring that workers receive full value without discounting. This allows the worker to reinvest freely in stocks, bonds, or other approved instruments. The government, in turn, honors and retires the redeemed portion of its RB obligation exactly as it would a maturing Treasury security.

Second, the RB may instead be exchanged for a government-issued security or custodial instrument specifically designed for PRA use—functionally like the investment options available in federal employee retirement plans. This exchange option ensures liquidity without forcing redemption and allows the RB’s value to migrate cleanly into a broader investment portfolio when PRAs move to commercial custodians. If PRAs become managed by commercial custodians, RBs could also be sold into a regulated secondary market, but such transactions would require safeguards to ensure workers are not pressured into disadvantageous liquidation.

From the federal balance-sheet perspective, the issuance of Recognition Bonds increases the reported national debt. However, it simultaneously reduces the vastly larger unfunded liability that Social Security currently represents. Today’s unfunded liability is not shown on the federal balance sheet at all, even though it exceeds tens of trillions of dollars. Replacing that implicit, politically contingent promise with an explicit, amortizing obligation improves fiscal transparency. Markets do not object to debt they can measure and model; they object to uncertainty. Recognition Bonds convert ambiguity into structure.

Because new workers enter PRAs instead of the old system, the legacy pay-as-you-go liability shrinks every year. As cohorts age and pass away, the total RB stock declines. Actuaries can model the redemption schedule precisely: RB issuance curves, interest accrual curves, and redemption curves can be projected decades in advance with far more stability than Social Security’s current benefit projections. Scenario testing—slow wage growth, recessions, rapid retirements, variations in PRA investment returns—becomes tractable. Analysts can quantify exactly how the transition behaves under stress. In every realistic case, the combination of a declining legacy system and rising private retirement capital creates expanding fiscal space rather than contraction.

Meanwhile, PRA contributions—which are separate from FICA—flow into accounts invested initially in regulated index-based funds. These contributions do, in a transition sense, create temporary federal liabilities because the government must simultaneously honor RBs and continue pay-as-you-go obligations; however, these liabilities are self-liquidating over time as PRA assets grow and pay-as-you-go declines. They build privately owned wealth. When accounts move to commercial custodians, they function essentially like IRAs. Their long-term effect is to shift the foundation of American retirement from public transfers to private capital accumulation, reducing future demands on government safety nets.

What emerges is an interlocking system in which the old and new structures support each other during transition but diverge permanently thereafter. FICA inflows remain stable, ensuring that current retirees are protected. Recognition Bonds convert accrued benefits into defined, funded obligations. PRAs accumulate real assets for future retirees. The federal debt structure becomes more transparent and more predictable. Markets gain clarity. Workers gain ownership and inheritability and, ultimately, a far better financial outcome. And the unfunded liability that once threatens the system’s solvency begins shrinking year by year until it disappears entirely.

The Plan does not simply adjust the existing framework; it replaces its foundation. It changes how retirement is funded, how obligations are recorded, how analysts measure risk, and how markets evaluate long-term fiscal sustainability. Most importantly, it carries forward Social Security’s concern for lower-income workers by embedding progressiveness directly into the RB valuation rather than abandoning it.

This is the architecture by which an unstable system gives way to one that can endure—orderly, measurable, and grounded in both economic prudence and moral justification.