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Private SS accounts, deconstructed
by Mary Deibel
Scripps Howard News Service

February 04, 2005

President Bush skipped the specifics of his plan for private Social Security accounts in the State of the Union and follow-up speeches, but details have begun to emerge. Here is what's known:

Q: How much could I put into my account?

A: Workers younger than 55 could divert 4 percent of pay up to $1,000 the first year with the annual maximum rising $100 plus inflation until everyone can contribute 4 percent of pay, whatever they make. That's about a third of the 12.4 percent Social Security payroll tax, which employers and employees split.

Q: Who qualifies?

A: Anyone born after 1949. People 55 or older stay in traditional Social Security. Workers born before 1966 could enroll in 2009, before 1979 in 2010 and everyone else in 2011.

Those who opt for private accounts cannot switch back if the market tanks, and they get smaller Social Security retirement checks that will be cut 3 percent plus inflation for every year they are in the work force. That's the same sum that 4 percent of pay would earn had it stayed invested in Social Security Treasury bills.

Q: What are my investment choices?

A: A few conservative stock and bond mutual funds similar to the federal employee Thrift Savings Plan: stock index funds, a corporate bond fund, a Treasury bond fund, an international fund and a "life-cycle" fund that automatically cuts investment risks as you age. Government would administer them for 30 cents per $100, compared to $1 for every $100 charged by a typical mutual fund.

Q: Could I borrow against my account?

A: No, and you couldn't withdraw money from it until you retire, either. So far, it's unclear how often you could change investments, although Bush's Social Security commission suggested once a year.

Q: What if I become disabled?

A: That's an open question. Of the 48 million Americans who collect Social Security this year, 17 million are children or adults receiving survivors' or disability benefits. Most workers don't consider the insurance side of Social Security, and so far the Bush plan is silent on the subject.

Bush says your children and grandchildren could inherit your account, but if the parent of a young child dies, would the family inherit only the account balance? Would they get survivor benefits at a reduced level? Would disability benefits depend on your account balance if you're idled younger than 51, the average age for disability? Nobody's saying yet.

Q: What happens if I divorce? Will I have a claim on my ex's retirement account and vice versa?

A: Another open question. Today you get a pro-rated share of your former spouse's Social Security check if the marriage lasted 10 years.

Q: What will my benefit be on retirement?

A: Another question mark. Senior administration officials say workers come out ahead if their account earns better than 3 percent above inflation annually over 35 years in the work force to make up for that reduced Social Security check.

The White House points to Social Security Administration estimates that a portfolio of 50 percent stocks, 30 percent corporate bonds and 20 percent government bonds could yield 4.6 percent a year after inflation, or $109,000 after 40 years' work if you invest $1,000 annually. But other analysts don't expect returns to be above 4 percent because of high stock valuation and low interest rates.

Q: What happens when I retire?

A: The money is subject to income tax on withdrawal and must be used to buy an annuity to provide a monthly check for life that lets you live at the poverty level, now $12,400 for a couple. If you have money left, it's yours to spend or leave to your heirs.

If your investments are losers or you retire in a prolonged market downturn that leaves you too short to afford the annuity? Bush hasn't said yet if he'd support a poverty-level guaranteed benefit or if you'd have to keep working in hopes the market rebounds.

Q: Will private accounts solve Social Security's long-term solvency problem?

A: No, and private accounts advance the date Social Security cashes in the last of Treasury bonds to 2031, not 2042 that system trustees estimate, says New York University economist Jason Furman.

Administration officials acknowledge the accounts are "net neutral" on Social Security solvency and more must be done to erase its shortfall, but they don't say what or where they get the $4.5 trillion to cover the 20-year cost of private accounts. Bush ruled out raising payroll taxes, which apparently requires additional benefit cuts, a higher retirement age, or both.


E-mail Mary Deibel at DeibelM(at)

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