Originally created 02/04/05

Plan would reduce guarantee benefits for younger workers



WASHINGTON - The Bush administration unveiled a host of details about its proposal to add personal accounts to Social Security, but key questions remain unanswered, including how much guaranteed benefits will be cut and how the plan will be paid for.

Under the proposal outlined by President Bush and his aides Wednesday, Social Security benefits would not change for retirees or wage-earners age 55 or older.

But the future government guarantee would be reduced for younger workers whether or not they set up personal accounts, but more for those who choose to divert some of their payroll tax to a personal account.

Eventually, Bush envisions permitting younger workers to invest two-thirds of their payroll taxes in the new private accounts. They would be required to purchase an investment that, when combined with a monthly Social Security check, would keep their income above the federal poverty level during retirement.

Bush's aides outlined selected details as he sketched his proposals in broad terms in his State of the Union address.

They omitted other material, declining to say, for example, how large a reduction in guaranteed benefits would fall on younger workers. Some estimates put it at more than 40 percent, although Republican aides stressed that any drop should be offset, at least partially, by income from personal investments.

Nor did the administration say how it would cover the so-called transition costs to a remodeled Social Security program, which it pegged at $750 billion over a decade.

Aides said Bush was not submitting legislation to Congress, responding to requests from Senate GOP leaders that he give them leeway to fashion a measure that can pass.

"I will listen to anyone who has a good idea to offer," the president said.

Democrats, in the minority in both the House and Senate, said they would oppose Bush's proposals, and they sat in stony silence when he outlined his case for personal accounts.

"Democrats are all for giving Americans more of a say and more choices when it comes to their retirement savings. But that doesn't mean taking Social Security's guarantee and gambling with it," said Senate Minority Leader Harry Reid, D-Nev.

Senate Democrats were sending Bush a letter Thursday urging him to limit borrowing in crafting Social Security legislation, saying it would be immoral to pass this debt onto future generations.

Administration officials acknowledged that the private accounts do not solve Social Security's long-term financial woes.

Without any changes, the program, established in 1935, is estimated to begin paying out more than it collects as early as 2018. In 2042, according to the program's official estimate, its trust funds will be depleted and benefits will be paid entirely from current tax receipts. At that point, checks are predicted to be only 73 percent of the amount now promised.

Under the Bush plan, individuals born in 1949 or earlier would stay in the current system without changes. Current retirees oppose personal accounts, according to a variety of polls. By setting the age cutoff at 55, Bush showed he was looking to ease the concerns of a politically pivotal group as he seeks to build congressional and voter support for far-reaching changes in the Depression-era program.

For younger workers, the option of new personal accounts would be phased in over three years. Those born in 1965 or earlier could begin participating in 2009. Those born in 1978 and earlier could begin the next year. In the third year, all eligible workers could open personal accounts.

Once workers opt for personal accounts, they could not move back into the traditional system, though they could move their money to low-risk government bonds.

The Bush plan would allow workers to divert about two-thirds of their payroll taxes into these accounts. The remaining payroll taxes would continue to go into the Social Security trust funds, as would the entire 6.2 percent payroll tax paid by employers.

To hold down the lost income to the Social Security trust funds, individual contributions would initially be capped at $1,000 per year. That figure would rise by $100 a year until all workers could invest the full 4 percent.

Those who choose to participate would have a limited set of investment choices, similar to those available in the Thrift Savings Plan, a retirement system for federal workers.

As workers neared retirement, they would automatically be enrolled into a "life cycle" account in which investments become more conservative as investors age. Those wanting a more aggressive investment would have to acknowledge the risks in writing.

The government would be responsible for keeping track of how much money is in each worker's account, a proposal aimed at keeping administrative fees low. The administration estimates annual administrative fees would total 0.3 percent of each account balance.

As their work years end, all workers with personal accounts too small to assure retirement income above the federal poverty level when combined with their monthly government check, would be required to purchase an investment annuity to guarantee such a level.

However, any money put into an annuity could not be passed on to heirs - and polling shows that inheritability is one of the most persuasive arguments for personal accounts.

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A look at changes to Social Security, which President Bush discussed Wednesday night in his State of the Union address.

OVERVIEW:

Bush is proposing to restructure the nation's retirement system to allow workers under age 55 to divert a portion of their Social Security payroll taxes into individual investment accounts in exchange for lower guaranteed future benefits.

Workers could invest this money, limited to $1,000 for the first year, in stocks and bonds in hopes of earning higher returns. There will be no change in the current system for those born before 1950 - meaning people who now are 55 and older.

PURPOSE:

Social Security is currently running a surplus, with more money coming in than is being paid out in benefits. This dynamic will start to change once the post-World War II baby boom generation begins retiring in a few years.

The Bush administration estimates that the system will start running a deficit in 2018. The nonpartisan Congressional Budget Office says that will happen in 2020.

The president's plan would help ease the future flow of red ink by reducing the total amount of benefits the government has to pay out, but the proposal would not totally close the gap.

WHO COULD SIGN UP:

Any worker born in 1950 or after. The accounts would be voluntary. A worker could decide to remain in the current system, but would not be guaranteed the same benefit levels as current retirees or those born before 1950.

Participation in the plan would be phased in over three years, based on the age of the work force. It would begin in 2009, for those born in 1965 and earlier.

INVESTMENT OPTIONS:

The accounts would be administered publicly. Investment choices would be limited.

The accounts would be modeled on the current Thrift Savings Plan for federal workers, in which there are five investment options, all mutual funds. One holds stocks of large companies; a second holds stocks of small companies; a third holds international stocks. All would be broadly diversified.

The remaining two funds are bond funds. One has corporate bonds and the other has Treasury bonds yielding the same amount as the bonds where Social Security funds are now deposited.

A person could hold a mix of the funds.

A sixth fund also is envisioned, where the ratio of stocks to bonds would change as a worker got older, with the bond portion increasing and the stock portion decreasing.

AMOUNTS THAT COULD BE CONTRIBUTED:

Workers could divert about two-thirds of their retirement taxes into personal accounts - as much as 4 percentage points of the 6.2 percent in individual withholding - but they would be guaranteed fewer benefits.

For the first year, the total could not exceed $1,000. This cap would rise by $100 a year. Eventually, there would be no cap, beyond the 4 percentage point limitation. Currently, Social Security taxes reach a ceiling when and if a worker reaches $90,000 of income.

MIX OF BENEFITS:

Workers would continue to get traditional benefits from the Social Security system because the private accounts would represent only a percentage of benefits. Benefit levels in the future from the traditional portion of the plan could not be guaranteed in advance.

FINANCING THE TRANSITION:

The government probably would borrow money to pay benefits during the transition to where personal accounts are fully phased in. The administration has yet to spell this out.

Independent estimates have ranged as high as $2 trillion, although the administration puts the figure at about $750 billion. The administration has not discussed possible benefit cuts for future retirees to close the gap between what the system takes in and will have to pay out.

ADVANTAGES:

Over the long haul, individuals can expect to earn higher returns by investing in stocks, or a mix of stocks and bonds, than from what is generated now by the low-yielding Treasury bonds held by the Social Security trust fund. Also, the accounts would be individually owned, and could be passed along to heirs - with certain exceptions.

RISKS:

Treasury bonds are virtually risk free; stocks and corporate bonds are not. Prolonged periods of market decline or lack of growth could eat into one's retirement assets.

LIMITATIONS:

Nothing could be withdrawn from the personal accounts before retirement, nor could money be borrowed from them.

If the flow of total benefits coming from both traditional Social Security payments and withdrawals from personal accounts dropped the retiree below the national poverty level, money from the personal accounts would have to be placed in annuities, which are investments yielding fixed payments during the holder's lifetime. However, such an annuity would not qualify to be part of an inheritance - and any funds that remained available under these annuities after death would revert to the government or annuity issuer.