Investment accounts key to reform plan

But president offers few details on cutting benefits to bridge funding gap

Social Security

State Of The Union

February 03, 2005|By KNIGHT RIDDER/TRIBUNE

President Bush laid out last night his case for creating individual investment accounts as part of a proposed Social Security overhaul. The White House added extra details about how the accounts would work. Still missing are specifics on more painful decisions on benefit cuts needed to handle the long-term shortfall the program faces with the retirement of the 77-million-mem- ber baby boom generation. Here's a look at the plan, which requires congressional approval:

Age 55 cut-off

There would be no changes in the Social Security program for retirees or workers born before 1950. The age cut-off reflects the president's promises not to change Social Security for current or near-retirees. Participation for workers now under age 55 would be voluntary.

Phase in

Beginning in 2009, participants born in 1965 and earlier could enroll in private accounts. In 2010, workers born in 1978 and earlier could join. And finally, in 2011 all remaining workers could sign up. The phase-in would help with an orderly implementation and allow the oldest workers the possibility of earning returns on investments sooner.

Size of investment

Eventually, workers could invest 4 percentage points of the current 12.4 percent Social Security payroll tax. But it would also be phased in: There would be an initial cap of $1,000, which would be increased $100 annually to the full 4-percentage-point ceiling.

Transition costs

Over the first 10 years of the program, the White House said $664 billion would be diverted from traditional Social Security to the individual accounts. Initial estimates by some experts, however, place overall transition costs at $1 trillion to $2 trillion. The White House figure is lower because the program is phased in and because it does not include costs beyond the initial 10 years. The transition would force the Treasury Department to borrow funds to continue paying benefits to existing retirees. Interest charges on the debt over the first decade would be $90 billion.

The investment portfolio

The program would be structured much like the Thrift Savings Plan, a retirement plan for federal employees. Participants could select from a handful of stock and bond portfolios similar to mutual funds. The funds might include large stocks, small stocks, international stocks, corporate bonds and Treasury bonds.

The life-cycle fund

The president also envisions an account that would be managed to reflect the age of the individual investor. Accounts for older workers would have higher percentages of conservative assets, typically Treasury bills and bonds. And younger workers would be more heavily weighted toward more volatile instruments, such as stocks.

Managing the funds

The government would administer the program. But Wall Street money managers under contract to the government would invest the portfolios. The White House estimated the administrative cost at 0.3 percent of assets annually.

Restrictions

Workers could not make withdrawals or take loans from their individual accounts. Once they retire, withdrawals would be limited so that there would be sufficient earnings when combined with traditional Social Security benefits to provide income above the poverty level. If a beneficiary dies before exhausting the individual account, it could be left as an inheritance.

Left unresolved

The president avoided the most difficult issue: Dealing with the shortfall Social Security faces paying the benefits that have been promised to future retirees. The White House and Congress face difficult choices, including raising taxes, increasing retirement age and trimming annual cost-of-living adjustments to beneficiaries.

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