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Q&A on how private accounts could affect you
By Mary Deibel
Scripps Howard News Service


February 25, 2005

Washington - When it comes to the private Social Security accounts President Bush wants, he focuses on the hope they would earn more than the current system and skips the details of how they would change the safety net for the nation's retirees, survivors and the disabled.

Yet those details raise "first-level questions that must be answered" so the public can tell if private accounts are a good deal, Yale law professor Michael Graetz says.

Graetz, a benefits expert and top Treasury official under the first President Bush, co-authored a new study for the National Academy of Social Insurance on the many questions that private Social Security accounts pose.

"Most of the Social Security discussion has been about how money would build up in the accounts" and ignores "largely neglected questions about how the money would be paid out," he says.

The few details offered by administration officials on the White House proposal include:

  • Private accounts that let workers divert up to 4 percent of their paycheck, one-third of the 12.4 percent Social Security payroll tax, will be voluntary for workers under 55.
  • Workers can't opt out once they're in or withdraw or borrow from the account.
  • Workers get a handful of conservative investment choices similar to the Thrift Savings Plan's stock and bond index funds offered to federal employees.

On retirement, you could not simply take the money out of the account. Instead the Bush plan would require you to buy an annuity, an insurance policy that pays a monthly stipend until you die.

But the devil is in the questions these few details raise:

Q: Why would I have to buy an annuity?

A: So that you wouldn't run out of money before you died. The Bush plan would require you to buy an annuity that provides enough money to live at the official poverty level, which is $12,400 for a couple today.

Q: What would the annuity cost?

A: That isn't spelled out yet, and nobody has said what happens to private Social Security account holders whose investments weren't profitable enough to buy an annuity that provides enough money to live on for the rest of your life. But the government's Thrift Savings Plan retirement annuities - already in place - offer an illustration:

  • A $50,000 annuity will pay a single federal retiree $268 a month starting at age 65 with payments increased up to 3 percent a year for inflation until death.
  • $50,000 joint-life annuities for married federal retirees pay $278 a month starting at 65, with payments increased up to 3 percent a year for inflation until husband and wife die.

Q: What happens to any money you have left over after the purchase of the annuity?

A: After the annuity purchase, any money left from the private Social Security account is yours to spend or save as you wish, though any withdrawals will be taxed as income and your spouse has a legal claim to your personal account.

Q: Annuities expire at death, so will my children inherit money?

A: Yes - if you have money left after you buy the annuity and you and your husband or wife haven't spent the private account balance.

Q: What about my spouse?

A: Because American women live longer on average than American men, and because women make up 58 percent of Social Security beneficiaries 62 and older, the question has particular importance for women.

Benefits consultant Anna Rappaport says her research shows that women face problems at all income levels under the current Social Security system because women make less on average than men, spend fewer years in the workforce and often hold jobs without other pension coverage.

Currently, widows who brought home a paycheck draw the benefits they earned or two-thirds of what the couple got, whichever is higher; stay-at-home spouses when widowed get a Social Security check two-thirds of what the couple collected, and former spouses get a pro-rata benefit if the marriage lasted 10 years.

Q: How will a widow or widower fare under private Social Security accounts?

A: The accounts are "marital assets," the White House says.

But don't assume spouses automatically inherit marital assets: State laws vary, and property division rules have changed as family structures have grown more complex. Typically, marital assets pass to the current spouse and children from current and former marriages, and most states set a minimum share for a spouse, whether or not there's a will. Spouses who get cut off must contest it in court.

Marital assets also are subject to court order in divorce. But here, too, state laws vary, and court-approved divisions of pensions, retirement accounts and other assets are subject to negotiation, Rappaport says.

Q: If I become disabled, can I tap my private account?

A: Maybe, maybe not. Of the 48 million Americans who collect Social Security this year, 17 million are children or adults receiving survivors' or disability benefits, the Social Security Administration says.

Most workers don't consider the insurance side of Social Security, and the White House hasn't addressed disability and survivor benefit questions, although the Bush 2001 Social Security commission assumed there would be benefit cutbacks.

Would your account balance determine your disability benefits? Three in 10 men and 1 in 4 women become fully disabled before retirement age, according to Social Security Administration figures.

The president says your children and grandchildren can inherit your account, but what 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? Rep. Richard Neal, D-Mass., lost both parents as a teenager and says monthly survivor benefits of $125 he and his sisters received were sufficient to keep them together.

Q: Could my creditors seize my Social Security account if I go bankrupt?

A: Also unclear. Current bankruptcy law protects Social Security and other benefits tied to age, illness or disability. But at the urging of the lending industry, Congress is poised to toughen the bankruptcy code so it will be harder to shed debts. Also keep an eye on the Supreme Court, which will decide soon if creditors can seize existing retirement accounts of bankrupt individuals.


Reach Mary Deibel at deibelm(at)

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