A Closer Look at Bush’s Proposal
How does the Bush administration expect Social Security investment accounts to work? Here are some details, based on a White House briefing Wednesday.
Question: How would the Bush proposal differ from the current Social Security program?
Answer: The existing system pays set monthly benefits for life, which are based on working wages. Under the president’s plan, participants could opt to put a portion of their Social Security taxes into personal investment accounts. Upon retirement, they would get a portion of their benefits in guaranteed monthly payments and a portion from their investment accounts.
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Q: Would the plan include cuts in benefits?
A: Yes. Those choosing a personal account would agree to accept reduced monthly benefits. In addition, across-the-board cuts in Social Security payments are expected in the future to eliminate anticipated shortfalls. The White House did not provide specifics about how deep those cuts might be or how they would be carried out.
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Q: How much income could be placed in a personal account?
A: Up to 4% of annual earnings, but no more than $1,000 in the first year. After that, the $1,000 limit could be increased by the same rate as the average percentage increase in wages, plus $100.
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Q: Would I be required to have a personal account?
A: No. The program would be voluntary, allowing those who prefer the current system to stick with it.
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Q: What would my investment choices be with a personal account?
A: They would largely mirror the federal thrift savings plan, which offers five options -- mutual funds invested in large-company domestic stocks, small-company domestic stocks, international stocks, corporate bonds and Treasury bonds. In addition, the Social Security program would offer a “life cycle” fund, which would mix investments in stocks, bonds, international securities and cash based on the participant’s age.
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Q: Would I be charged investment management fees?
A: Yes. The government expects that the investment management fees would be 0.3% of assets each year, which works out to about 30 cents for each $100 invested.
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Q: When would personal accounts become available?
A: The program would be phased in over several years. People born between 1950 and 1965 would be able to set up personal accounts starting in 2009. People born between 1966 and 1978 could join the program in 2010, and people born after 1978 would be eligible starting in 2011.
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Q: What about those born before 1950?
A: They would be ineligible. Their Social Security benefits would be calculated under the current system.
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Q: Would I be better off with a personal account or the existing system?
A: That’s impossible to say. Administration officials said personal accounts would benefit anyone who could earn more than 3%, after inflation, on their investments. They could be a wash or a loss for those who invest unwisely.
