Accounts Hold Risks, Rewards
How would the creation of private investment accounts under Social Security affect you?
A lot depends on your situation.
Young workers who are able to divert money into a personal account for decades, and whose investment decisions prove successful, could earn significant nest eggs. Workers who die relatively young might also be able to pass something on to their heirs.
Others could find themselves living on far less at retirement -- including people who don’t have a long time to contribute, or whose investment choices turn out poorly. People who live very long lives also could come up short.
The following may help you understand the potential risks and rewards of personal investment accounts.
Question: What are Social Security personal investment accounts?
Answer: President Bush has not fully detailed his proposal, but based on the broad outlines of a presidential panel, one scenario would allow young and mid-career workers to divert about one-third of their Social Security taxes, up to a maximum of $1,000 per year, into private accounts.
Workers would be able to invest that money in mutual funds, such as the stock and bond funds offered through 401(k) retirement plans.
Q: Which workers would be eligible?
A: That’s not yet clear, but it’s likely to include everyone from 16-year-olds starting a first job to 40-somethings who are well-established in the workforce.
The plan is likely to exclude older workers -- those in their 50s and 60s -- because Bush has said that he wants to leave Social Security alone for those at or near retirement. Older workers wouldn’t have enough time to accumulate balances in personal accounts substantial enough to make up for losing a portion of their guaranteed monthly Social Security benefits.
Q: How much money could these private accounts generate?
A: That varies widely. If the account generates average annual returns of 3%, someone who socks away $1,000 a year would have $27,357 after 20 years. At a 9% annual average return, however, that account would be worth $55,655. See the accompanying chart for other scenarios.
Q: How could you use that nest egg?
A: You probably would be able to tap all or some of that money whenever you want after your Social Security retirement age. That retirement age is slowly ratcheting up; for those born in 1960 and after, it will be age 67.
Those who want to use their personal investment account nest egg to cover monthly expenses without touching the principal can take the account totals shown in the chart and multiply them by a modest investment return -- say 3% to 5%. Divide that sum by 12, and the answer will tell you how much interest you could pull out of the account each month without diminishing the baseline amount.
Q: Is there a risk of losing money?
A: Yes. Just because stock funds have gained value in the past is no assurance that they will continue to rise in value in the future.
In addition, workers who agree to set aside money in a personal investment account would agree to forego a similar amount of future Social Security retirement benefits. In other words, workers who divert a third of their Social Security tax money would forego about a third of future monthly benefits.
Thus, poor investment returns pose the potential for workers to have far less at retirement than they might have had under the existing system.
In addition, private accounts can be depleted before the worker dies, so there’s a chance that workers could outlive their savings. That means a worker could be forced to live out their final years on two-thirds of their regular retirement benefit (if they divert one-third of their Social Security taxes).
Q: Could you choose not to participate in the personal accounts?
A: Probably. Bush has said that he wants the accounts to be voluntary. But because the system is expected to run short of the money it needs to finance current Social Security benefit levels by 2042, it’s likely that today’s young workers would face benefit cuts in the future, according to a report by a presidential panel charged with studying Social Security.
The government is likely to stress that personal accounts might give workers the ability to make up for those cuts by investing their Social Security contributions wisely.
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Many happy returns?How much money will private Social Security accounts generate? Much will depend on how much interest the accounts earn. Here are some different scenarios, based on a worker setting aside $1,000 a year.Value of a private account:
*--* Return Time on money is investment invested 20 years 25 years 30 years 35 years 40 years 3% $27,357 $37,166 $48,559 $61,794 $77,168 5% $34,251 $49,623 $69,352 $94,671 $127,163 7% $43,408 $67,503 $101,660 $150,082 $218,725 9% $55,655 $93,423 $152,556 $245,139 $390,094
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Assumes an investment of $83.33 per month, or $1,000 per year.
Source: Times research
