Simple in Concept, Baffling in Practice?

If the devil is in the details, the nation can expect a hellish time once Congress starts writing proposals for private Social Security investment accounts.

President Bush is pitching this as a simple idea: Let the people control a chunk of their Social Security savings.

The concept may be simple, but the execution threatens to be mind-numbingly complicated, if the proposal flies.

Consider this, for example: You’re 23 years old, and you think Bush’s plan is spectacular. You relish the idea of investing some of your payroll taxes in the stock market, even though it means you would surrender part of your future Social Security benefit in retirement.

But what if, at age 33 or 43, your views change? Could you opt out of the private account?

The answer: Sort of, according to Bush administration officials. (More on this later.)

Here’s another question: Would the money that accumulates in a private account be yours to bequeath to your spouse or family?

The president says you could count on that. But there’s a hitch: The government assumes that part of the sum you build up would be turned into an annuity, generating monthly payments throughout retirement. That part wouldn’t be inheritable.

None of this necessarily means private accounts are too much trouble to try. We know they’re doable because other countries have introduced them -- Chile, Britain and Sweden, among others.

But the United States would by far be the biggest experiment in the partial privatization of a government retirement system. So in terms of the long-run health of the global economy, it will matter a lot more whether a U.S. privatization plan leads to better retirement years for its scores of millions of future seniors than whether, say, Sweden’s plan does for its relatively small population.

With so much at stake, it make sense for both supporters and opponents of private accounts to understand how they would work, and what people’s practical (i.e., real-world) concerns might be relative to the ideological appeal of giving Americans more control over their Social Security savings.

Here are some of the selling points the Bush administration is using in its pitch for private accounts, and some of the details that are obscured by the sound-bite summaries of the proposal:

* It would be your money. You’d invest it, and it would be yours to keep when you retire. Sounds simple enough. The administration wants a voluntary program that would allow workers to divert up to 4 percentage points of their Social Security payroll taxes into private investment accounts each year, limited to $1,000 in the first year but rising modestly thereafter.

The administration envisions that, at least early on, workers would have a limited choice of broadly diversified stock and bond funds.

“Best of all, the money in the account is yours, and the government can never take it away,” President Bush said in his State of the Union address last week.

But things would get more complicated when the time comes to draw money out of the accounts. It still would be your money at that point, but you wouldn’t be able to simply walk away with the sum total.

Instead, the government would require you to annuitize some portion of the total so that it comes to you in pieces each month for the rest of your life. The amount to be set aside as an annuity would depend on what you would be receiving in traditional benefit payments from the Social Security system, which would be reduced to account for what you’ve contributed to your private account.

Essentially, the government’s goal is to make sure there is some minimum amount coming to you each month -- and that you can’t run off to Vegas with your life’s savings in hand.

That also means you couldn’t bequeath whatever portion of your private account is annuitized. “If you buy an annuity and die early, obviously, that limits the amount that [you’re] able to pass on” to heirs, a senior administration official said in a background briefing for the media last week.

Michael Graetz, a law professor at Yale University, coauthored a recent report for the National Academy of Social Insurance on the issues that would be involved in setting policies for retirement draw-downs from private Social Security accounts. The study runs for 240 pages -- a measure of the complexity of the topic, Graetz said.

“People have thought a lot about the accumulation phase of these accounts but not about the payout stage,” he said.

* The program is voluntary. No one would be forced to choose private accounts. But what if the idea begins to look less appealing years after you’ve bought into it?

Asked about an opt-out clause, the administration official at the background briefing put it this way: A worker using a private account could effectively move to a neutral position by shifting all of the assets in the account to Treasury bonds.

How would that be neutral? The administration assumes that you would earn a 3% real (after inflation) annualized return on Treasury bonds over time. That’s exactly the amount by which your traditional Social Security benefit would be reduced for participating in private accounts, under the administration’s assumptions. So you would come out even, the official said -- as if you hadn’t taken a chance on a private account.

Would it work that way in practice? How many workers would understand the concept? Those details are yet to come, or are simply unknowable.

* You’d just have to beat a 3% real return with your private-account investments to top what Social Security would pay you. Herein lies the real appeal of Bush’s idea: the chance to earn more than what the government would be paying you in traditional Social Security benefits.

If the stock market gains 7% a year, on average, and inflation is 3% a year, the real return would be 4%. Under the administration’s proposal, that would be 1 percentage point better than what you’d earn by leaving your money in the Social Security system (because, as noted, the system assumes a 3% real return on Treasury bonds, which is what the system owns).

Obviously, if you invest well, and the markets cooperate, you could come out ahead with private accounts. You also could do worse than sticking with Social Security as is.

How many people invest well to begin with? And how many think they can do so without having to pay someone (a financial planner, broker, etc.) to help them?

“You don’t need anyone to tell you what your Social Security benefit will be,” said Teresa Ghilarducci, an economics professor at the University of Notre Dame. “But with private accounts, you will need someone to tell you how much you’re going to have” under different market scenarios.

For millions of Americans who don’t now have the wherewithal to invest, private Social Security accounts are touted by proponents as a way to introduce investing precepts and to encourage more saving.

Yet for many people, investing decisions are nothing but a headache, and always will be.

Said Craig Copeland, head of Social Security research at the Employee Benefit Research Institute: “You can send them an account statement, but you can’t make them read it.”

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Tom Petruno can be reached at tom.petruno@latimes.com.