December 10, 2004

Gambling on Social Security: Would young people fare better under Bush plan?

By Chris Otts and Rebecca Trela
Scripps Howard Foundation Wire

WASHINGTON – Like many young workers, Libby Bibings, 23, has given only a fleeting thought to saving for retirement. But if she doesn’t start soon, she admitted, it may be too late.

Bibings, who works with disabled people, knows that Social Security may go bankrupt before she retires, but even if it doesn’t, the payout won’t be enough to live on.

“I think it makes it more important for me to start saving on my own,” said the University of California, Davis, graduate when she visited Washington recently.

President Bush and some Capitol Hill lawmakers want to give her that opportunity – to take some of her Social Security out of the government’s hands and invest it in the stock market. The yield could be greater, they say, but the plan comes with higher risk and substantial upfront costs.

Social Security, the cornerstone of retirement funds for most Americans since the 1930s, is based on a revolving-door system. Today’s workers pay taxes that are turned over to today’s retirees. But the retired population is growing as the worker pool is shrinking. Within 20 years, there won’t be enough workers to pay promised benefits. Backup funds will keep checks coming until 2042, according to the Social Security Administration.

To cover the shortfall, Republicans are eyeing a politically ambitious plan: Instead of raising the retirement age or cutting benefits – a moderate fix – they want workers to divert a portion of Social Security monies into personal retirement accounts that would buy mutual funds and other investments. With the potential for higher returns, they say the plan could make up for the benefits Social Security won’t be able to provide to the next generation of retirees.

“You want to make it lucrative enough that people participate,” said Thomas R. Saving, a member of the President’s Commission to Strengthen Social Security. The group was asked to find a way to integrate private accounts into Social Security. “You want to make it so profitable for young people that it would be virtually insane not to participate.”

Several proposals have been introduced in Congress, but Bush is likely to support a plan similar to one suggested by the commission, said Saving, a senior fellow at the National Center for Policy Analysis. None requires anyone to participate, and any plan is likely to bar those 55 and older from setting up private accounts through Social Security.

Workers currently pay 6.2 percent on the first $87,900 of their wages to Social Security, and employers match that amount. Under a personal retirement account plan, workers would be able to set aside about 4 percent of their paychecks – two-thirds of what they now pay to Social Security – for investments. The employer’s contribution would remain unchanged.

Changing the way Americans save for retirement, however, does not come free. A sizeable influx of cash – at least $2 trillion – would be needed to provide benefits to current retirees while today’s workers wait for funds to mature.

The transition money is what Peter Orszag, an opponent of private accounts, calls “the magic asterisk.” It would have to come from somewhere – most likely from higher taxes or more government borrowing. Even if private accounts could provide higher benefits in the long term, transferring to the system would destabilize the economy, he said.

“It is a cruel hoax,” said the former Clinton administration economic adviser, now a fellow at the liberal Brookings Institution. “It puts the system in a very wobbly position – to be relying on trillions of dollars from the rest of the budget – when the rest of budget is expected to be in a massive deficit.”

Finding a way to fund the shift is the biggest roadblock for personal account proponents. Most plans introduced in Congress suggest some combination of tax increases, reduced benefits, less spending and borrowing.

The transition will require some belt-tightening, proponents admit, but so will any plan to fix Social Security, which is expected to accumulate a $3.7 trillion deficit over the next 75 years.

“I don’t want to pretend that you can do this for free,” Saving said. “There really are transition costs. But there are also great benefits.”

The benefits are higher profit margins, he said – at least a 2 percent return on investment. It would be even reasonable to expect about a 5 percent return, said David C. John, a private accounts proponent at the conservative Heritage Foundation.

For a young person, such as John’s daughter, a college freshman studying nursing, a personal account looks promising compared to the current system, which would likely pay her less money when she retires than what she originally contributed, he said.

Another part of privatiza-tion’s appeal is the idea of ownership. Instead of being absorbed by the government, unspent money from individual accounts would be part of the worker’s estate. But workers would not be free to invest the money outside a range of specified options or withdraw it before retiring.

With more control over their Social Security money, workers would also inherit more risk, opponents caution. The public doesn’t seem entirely comfortable with the idea, either.

“I think it’s kind of scary that your money would be in the stock market,” Bibings said. “That’s not really that secure. I mean, you don’t know what’s going to happen.”

Brian Yourish, 32, who works for a nonprofit group in Washington, said personal accounts are appealing. But the wild card, he said, is the possibility that millions of people could make poor investments or that the stock market might crash.

“The heart of Social Security seems to be that it’s going to be there, regardless of other things you’ve done with your money in the private realm,” he said.

John downplayed the risk, saying long-term investments would be relatively safe. A good personal account plan would include riskier, high-yield investments when workers are in their 20s and 30s. As they age, their money would be moved into government bonds and other low-risk investments. “The younger you are, the better you would do,” with a private account, he said.

Any plan likely to be enacted would also include a failsafe guarantee of at least poverty- level retirement for most workers, John said.

When planning for retirement, young people “need to basically ignore Social Security,” said Ric Edelman, a financial planner and author who supports private accounts. Even if personal retirement accounts are available, it is more important for young workers to fully participate in 401(k) plans offered by their employers, set up individual retirement accounts and make investments in stocks and bonds than to rely on Social Security, he said.

But young people often find it difficult to save for retirement.

“We’ve been talking about saving for retirement since before we got married,” said Maranda Dent, 20, an office assistant in Spring Valley, Calif. Her husband of one year, Curtis, 28, is a Naval oceanographer. “Every time we want to save, something comes up and we have to spend the money.”

With a bit of resignation, Dent said she’s indifferent to the private accounts idea: “The risk of the government failing us and the stock market failing on us is about the same at this point.”

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