How Would the Bush Plan Work?

By Jyoti Thottam

The Bush Administration has not yet offered details of its plan for Social Security, but it's expected to follow the contours of a proposal spelled out by a 2001 commission on Social Security: a combination of scaled-back guaranteed benefits and private investment accounts. This controversial proposal would divert a portion of your payroll taxes to a private account, to invest as you choose. Participation would be voluntary, and there would be a ceiling on how much you could put in. You would not be able to draw on the money until retirement, when it would be paid out as an annuity with your Social Security check. The benefit cuts are meant to address Social Security's long-term financial health; the private accounts are meant to deal with your future. Would you be better off?

THE PROS

1 Control. Under the current system, each generation of workers pays for the retirees ahead of it. With a private account, some of the money you put in would be there for you alone rather than fund someone else's golden years.

2 Better Returns. With Social Security, funds set aside for the future earn a minimal return over time, because the government invests them conservatively, in Treasury bonds. Investing in the stock and bond markets via private accounts could allow those dollars to grow faster.

3 Offset the Pain. Benefit cuts will probably be necessary to keep Social Security solvent as the number of retirees grows. The appeal of private accounts might persuade voters to accept the trade-off.

4 Encourage Savings. Private accounts reinforce a mind-set of saving. When you see a direct connection between what you put in now and how it can grow in the future, you may be motivated to save more elsewhere.

5 No New Taxes. The commission's plan, if adopted, avoids the unpleasant medicine of higher payroll taxes. Set at 12.4% of taxable wages, they already squeeze earners.

THE CONS

1 Risk. Getting a good return on your private account is up to you. If you make poor choices, you can lose money, and your nest egg will suffer. Invest too conservatively, and you will not be able to make up for the cuts in benefits.

2 Debt. The costs of making the transition to a private-account system are estimated at up to $2 trillion. That burden will widen the government's already yawning budget deficit, and could put the economy at risk for higher interest rates.

3 Uncertainty. Private accounts on their own do nothing to solve Social Security's solvency challenge and may discourage people from supporting real solutions.

4 Undersaving. With private accounts in place, some people may be tempted to save less elsewhere. Americans' record of saving is not encouraging; two-thirds of retirees rely on Social Security as their primary income.

5 Delayed Reaction. By promising to preserve current benefits and funding the transition costs through borrowing, this plan shifts costs to future generations, who will have to pay off the debt. --By Jyoti Thottam