Hurdles Big, Small for Retirement Reform


How do you keep track of the investments of 150 million people, millions of whom contribute as little as $40 a year?

How do you persuade brokerage houses, which make no profit on such small accounts, to offer their products to these fledgling investors?

These are just two of the technical puzzles that must be solved if President Bush's Commission to Strengthen Social Security, which held its inaugural meeting Monday, is to develop a workable plan to let workers invest some of their payroll taxes for their own retirement.

The political hurdles--in particular, protecting people's retirement incomes from the vagaries of the stock market--have captured most of the headlines. But if Bush's commission is to redeem his campaign promise to privatize at least a portion of Social Security, the technical problems may prove more difficult.

Privatizing Social Security means developing a new record-keeping system for 150 million workers, including at least 5 million who earn $2,000 a year or less and many more who have three or four jobs in a year and pay Social Security taxes at each.

If the system can be developed, the next problem will be what to do with workers who put $40 into their investment accounts in the first year. At current prices, that's enough to buy one-third of a share of IBM or half a share of Fidelity Investment's most popular Treasury bond fund.

David John, a policy analyst with the Heritage Foundation, a conservative think tank, would pool the small deposits of low-income workers in a central money market fund until these deposits grew large enough to be invested individually. He predicted that the new commission would hit upon a workable formula to make this happen.

On the contrary, said Robert J. Myers, Social Security's chief actuary from 1947 to 1970; it would be impossible to keep track of whose money was whose. He predicted "a horrible, horrible mess."

"There would be millions of people for whom the accounts would be floating around," Myers said. "The government might manage to keep track of well-paid workers with steady jobs who live in the same homes for a long time."

But in a mobile society in which people move frequently from town to town and job to job, Myers estimated that it would be impossible to link about one-third of all workers to their investments.

Bush's aim is to give all working Americans the opportunity now enjoyed by the half who own stocks and bonds either directly through individual investments or indirectly through pension programs. Although he has offered no specific plan, discussions during the campaign started with several assumptions.

There would be no change in benefits for current retirees or those nearing retirement. But workers under an age cutoff--perhaps 40--would be allowed to divert some of their payroll taxes to personal investments on a voluntary basis.

How much of their taxes? A commonly mentioned figure is 2% of salary. That would be about one-third of the taxes that workers now pay into the system at a rate of 6.2% of salary.

Take a worker earning $50,000 a year. The total tax is now $3,100, of which $1,000 would be available for the individual investment account.

The thorniest administrative problem is getting this money into the investment markets. The worker's employer now sends the payroll taxes to Washington every pay period. But it takes the Social Security Administration up to 18 months to link that money with each worker's name. Money earned in 2001, for example, will be matched to an individual only in July 2002.

No problem, said William G. Shipman, a prominent privatization advocate and the head of State Street Global Advisors, which manages $750 billion in investment funds. The government can invest the tax receipts in a money market fund until it can link chunks of the receipts with individual taxpayers, he said.

At that point, taxpayers would be offered a choice of mutual funds, according to a preliminary privatization blueprint drawn up by State Street in consultation with other experts. If people didn't know which one to choose, the money would be automatically placed in a balanced fund that reflected the kinds of stocks and bonds chosen by professional money managers for corporate pension funds, said Shipman.

Myers said Shipman's idea wouldn't work for the millions of people "who don't know a stock from a bond" or for the many more who couldn't be located because they had quit their jobs or moved.

Many of them work for small businesses already burdened by government paperwork. Myers said these companies lack the computers necessary to keep track of the investments of workers on the payroll, let alone those who have left.

Nor would Wall Street bother with these small-fry accounts, he said. Those earning $10,000 a year would have only $200 to invest in their individual accounts.

Vanguard, the second biggest mutual fund company with 15 million individual accounts, requires a $1,000 minimum to open an individual retirement account. The firm already operates at rock-bottom costs, and for the kind of tiny individual accounts that might be created under privatization, "it would be very difficult for the economics to work for us," said John Woerth, a Vanguard spokesman.

Shipman's rejoinder is that the small accounts can be maintained by the government in a narrow selection of mutual funds. When accounts reached a sufficient balance, they would be attractive to Wall Street firms.

But Myers said: "The best thing the commission can do is say that privatization is a great idea philosophically but there is no way in the world to administer it."

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