- The Washington Times - Sunday, February 6, 2005

President Bush’s Social Security reform proposal to let workers invest some of their payroll taxes in stocks and bonds would dramatically change the way millions of Americans prepare for their retirement, but the complex details of how his sweeping plan would work have been obscured by the furious political battle it has ignited.

Mr. Bush’s personal retirement account (PRA) plan has been attacked by the AARP as a high-risk gamble, which the politically powerful retiree lobby compares to playing the slot machines, even though one of the few investment choices the plan would allow is what Social Security invests in now — U.S. Treasury bonds.

Democrats in Congress have charged that the proposal would result in retirement benefit cuts of more than 40 percent and say that the system “is just fine” for the next 50 years, while the program’s trustees say it is headed for bankruptcy if nothing is done to change it.

“This willful misunderstanding of the operation of personal accounts is dishonest and obscures the truth,” Heritage Foundation analysts David C. John and Keith Miller said in a memo released after Mr. Bush’s State of the Union address.

“While inaction will lead to automatic cuts in Social Security benefits, personal accounts could allow Social Security to pay what it has promised,” they said.

Doing nothing, most independent analysts think, is far riskier to the solvency of the Social Security system and its beneficiaries. Without any changes to its financial structure, government trustees say it will need an infusion of $27 trillion through 2079 to finance future benefits for millions of additional retirees.

Here’s how the program would work:

Workers younger than 55 would be allowed to voluntarily invest up to 4 percent of their income in a small number of government-approved stocks and bonds, or a mixture of the two to minimize risk. It would be modeled after the government’s Thrift Savings Plan, which allows federal employees to invest in a choice of five stock and bond funds to supplement their federal pensions.

Despite charges by critics that the accounts would mean cuts in benefits, retirees and those who are 55 or older would not be affected by Mr. Bush’s plan. They would receive their full benefits under the existing system.

Younger workers who want a PRA would be gradually phased into the program over three years, according to their age, with the oldest going first.

“The first year that we envision that people would have a complete investment control of their personal accounts would be 2009,” said a senior administration official who briefed reporters on the president’s plan last week.

Annual contributions to the retirement accounts eventually would rise to 4 percent of wages, but would be capped at $1,000 in the first year, rising by $100 a year until they reach the maximum. This means, for example, that the yearly investment of someone earning $25,000 would be capped at $1,000; a person earning $75,000 annually would be able to invest $3,000 under the plan.

Anyone who chooses to remain within the present Social Security program would be allowed to do so.

The investment program would be administered by a federal agency, probably the Social Security Administration, but the funds themselves would be managed by professional mutual managers that handle IRAs and employee 401(k) investments.

The Bush administration estimates that the funds would have a very low administrative cost of about 0.3 percent of each account’s balance, most of which would go to the federal agency handling the accounts, not to the fund managers.

The number of available funds initially would be limited to large corporate stock index, corporate bond index and government bond funds. As more investors participate, the number of funds could be expanded.

Account holders also could open up a life-span fund that gradually and automatically would shift their investments out of stocks and into the more secure government bond funds as they approach retirement.

Upon retirement, account holders essentially would have dual sources of income, part of it a monthly benefit from the PRA, and part of it paid from Social Security under its present benefit formula, minus the amount of money that was diverted into a worker’s PRA, plus interest.

Workers would be required to take their PRA retirement income in the form of an annuity or in monthly income withdrawals, or could leave funds in their account and build a larger nest egg that they could leave to their heirs.

“So you are guaranteed that the government money and the annuity money would at least equal the amount of Social Security benefits you would have received,” Mr. John said.

The advantage to investors in PRAs would be the likelihood that they would earn much more than what Social Security would have paid them. The Thrift Savings Plan stock and bond funds open to federal employees have been delivering a 10-year average annual rate of return of between 6 percent and 11 percent, the senior administration official said.

Supporters of Mr. Bush’s proposal acknowledge that critics of the plan have scored some points in the past few weeks, which has hurt their cause.

“The battle has been joined and we are now in the bottom of the first inning and the president is up to bat. The other team has scored a couple of runs and the charges they’ve made have sown a great deal of confusion. They’ve muddied the water so that people are not sure exactly what to believe,” said Michael Tanner, Social Security analyst at the Cato Institute.

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