Unanswered questions about changes in Social Security

PERSONAL FINANCE

February 04, 2005|By EILEEN AMBROSE

WE KNOW MORE about President Bush's plan to partially privatize Social Security than we did before the State of the Union address.

We know, for example, there would be no changes for people 55 and older. Those younger will have the option of investing up to 4 percentage points of their payroll taxes in conservative bond and stock funds. Private accounts would be gradually rolled out over two years beginning in 2009.

But there are still some missing pieces. As Bush tries to convince workers and retirees around the country over the next few days that overhauling the 70-year-old system is in their best interests, it's a good opportunity for them to get some answers for all the rest of us.

Here are some questions that people should be asking the president:

What happens to survivor and disability benefits? About 20 percent of Social Security beneficiaries are children and adults under age 65 receiving disability or survivor benefits.

This is something that young workers don't think about, and Bush isn't talking about.

"People think they are not getting any current benefits today from Social Security. They are just wrong. They are getting disability insurance and survivor insurance," said Martha Patterson Priddy, director of human capital practice for Deloitte Consulting in Washington.

The fate of these benefits isn't clear under the president's plan. "He's been very quiet about that," she said.

Bush has said a worker's children could inherit a private account. But if a parent of small children died, would the family receive only the balance of the private account or would they get additional survivor benefits until the child is 18?

What will my retirement benefits be if I have a private account? "Frankly, that's still a bit up in the air," said Rudolph Penner, a senior fellow at the Urban Institute in Washington.

The administration has released a formula, but it's complicated "even for us policy wonks," Penner said.

Essentially, the government lends you money to invest in your personal account and when you retire you pay the government interest for the loan, said Penner, who worked in the Congressional Budget Office in the 1980s. It's not clear what additional reductions in benefits there might be, he said.

A senior administration official told reporters that workers would come out ahead if they earned more than 3 percent above the rate of inflation annually in their private accounts.

But markets are hardly predictable. What if you don't earn 3 percent over inflation, which could be difficult if inflation roars back?

If private accounts are voluntary, what happens if I opt out? Even if you don't invest in a private account, your guaranteed benefits will likely be cut anyway, experts said. But how much?

It's anticipated that those under 55 will see a gradual decline in promised benefits. One scenario would reduce promised benefits 1 percent each year, so the benefits would be cut 1 percent for a 54-year-old, 2 percent for a 53-year-old and so on, said Ron Gebhardtsbauer, a senior fellow with the American Academy of Actuaries in Washington.

What if I lose money in my investments? "That is the $10 trillion question," said James Angel, an associate professor of finance at Georgetown University. "It's one thing if one investor rolls the dice and comes up with snake eyes. But what if a whole generation is stuck with a long period of underperformance in the market? Will the government bail out the people with private accounts or not?"

If there is a protracted downturn, the economy will be in the tank and there won't be money to bail out investors, Angel said.

But supporters of private accounts say that, over the long haul, investors will make money on the accounts. And the president promised that the government would provide good options to protect accounts from sudden market swings on the eve of retirement.

Workers likely will be urged or required to move their money into bonds or cash as they near retirement. They might also be encouraged to invest in so-called life cycle funds that gradually get more conservative as retirement approaches.

How much will I pay in fees on my account? The president promised to make sure "your earnings are not eaten up by hidden Wall Street fees." Some experts predict annual fees of 0.20 percent to 0.30 percent per account. Those would be very low, the kind of fees that only large index funds offer.

Others suggest that cost of managing so many small investment accounts won't be cheap. And there's a distrust of Wall Street after a series of scandals.

"There are a lot of Wall Street fees? Which fees is he talking about? Upfront commissions? Back-end commissions? Management fees?" said Jerry Cannizzaro, a financial planner in Virginia. "Trust me, Wall Street is not going to do this stuff for free. My real fear is that Wall Street will find a way to get in there and make some big-time money."

How will you pay for this? "That is one thing blatantly left out," Georgetown's Angel said.

It's a question that all twenty-somethings in particular should be asking - they are the ones who will likely bear the brunt of the costs.

Social Security is a pay-as-you-go system, so the payroll taxes paid by today's workers finance the benefits of today's retirees. Diverting money from the system to private accounts means that the government will have to come up with more money to pay retirees. Estimates have been as high as $2 trillion for just the first decade.

"The younger workers get the shaft. They are forced to pay for their own retirement and their parents' retirement," Angel said.

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