Cracking the Nest-Egg Problem

Times Staff Writers

As President Bush tours the country to promote his Social Security restructuring proposal, he has taken to describing the sizable nest eggs he says workers could accumulate if Congress would only let them put part of their payroll taxes in personal investment accounts.

“Right now, when we collect your money ... you’ll be displeased to know you get about a 1.8% return on your money, which is a pitiful rate of return,” Bush said Thursday in Hopkinsville, Ky., the 33rd stop on a Social Security barnstorming tour that began in March. “It doesn’t take much to get a better rate of return than the government gets for you now.”

Yet in the view of Bush’s political opponents, his sales pitch is based on a false comparison between social insurance programs and retirement savings accounts, as well as assumptions about future investment returns that may prove unrealistic.

“The sort of support provided by Social Security is really hard to replace in the private sector,” said Kenneth Apfel, Social Security commissioner during President Clinton’s second term.

Nevertheless, the nest-egg anecdotes have become a staple of Bush’s roadshow remarks.


“If you’re a 20-year-old making $8 an hour ... you’ll end up with a nest egg of $100,000 when you’re 63,” Bush said Thursday. “If you’re a police officer and a nurse ... when you retire, both of you will have a combined nest egg of $669,000.”

Bush wants Congress to let workers born in 1950 or later divert a third of their Social Security payroll taxes into investment accounts they would control. These accounts would be part of a broader plan to ensure Social Security’s solvency by reducing the future growth of government-provided benefits for upper-income and medium-wage workers.

Although the accounts by themselves would do nothing to close Social Security’s long-term funding gap, Bush contends that their bigger investment returns would help future retirees recoup the benefit reductions needed to shore up the system.

Bush’s argument is based on his assertion that Social Security returns 1.8% on the investment of average workers who contribute payroll taxes to the system over a lifetime.

By contrast, the White House says, a personal account containing a conservative mix of stocks and bonds would earn an average return of 4.6% a year, assuming the nation’s financial markets perform as well in the future as they have in the past.

But the president’s critics don’t buy that argument. When Bush contrasts the 1.8% rate of return on traditional Social Security with the 4.6% projected return on stocks and bonds, they say he might as well be comparing apples and aardvarks.

For one thing, the 1.8% figure is unrelated to the interest rate paid by the government on surplus Social Security tax revenue, which by law is invested in government bonds. Rather, it was derived by estimating the benefits collected during a retirement of typical length and comparing that to total taxes paid.

In reality, the return received by low-wage workers is greater than that received by higher-income wage-earners because Social Security’s benefit structure is progressive. The dispute reflects a fundamental disagreement over the purpose of Social Security, Bush critics say.

Sylvester Schieber, a retirement benefits expert with the consulting firm Watson Wyatt, said the 70-year-old New Deal program was designed as a social safety net as well as a retirement savings vehicle.

Besides generating monthly income for retirees, it provides insurance against unexpected and unwelcome events -- disability, for example, or the death of the family breadwinner -- as well as expected and welcome ones, primarily long life.

For example, of the 9,960 Social Security recipients in Kentucky’s Christian County, the site of Thursday’s event, 2,105 receive disability payments, 1,140 get surviving spouse benefits, and 475 are surviving children receiving benefits, according to the seniors advocacy group AARP, which is fighting Bush’s personal-account plan. That leaves 6,245 who receive traditional retiree benefits.

Bush’s opponents say it is misleading to judge an insurance program solely by its apparent rate of return. Homeowners don’t expect to collect more over a lifetime than they pay for their homeowners’ insurance, Schieber noted. Likewise, workers can’t all get more in Social Security benefits than they pay in taxes.

Bush has proposed two kinds of cuts from traditional benefits: one to help assure the future solvency of the system, the other to offset the payroll taxes diverted to private accounts.

He would reduce initial retirement benefits for all but the lowest-paid 30% of wage earners, whether or not they participated in individual accounts. Those who earned the highest wages would be hit the hardest.

Workers who diverted some of their payroll taxes into individual accounts would find their traditional benefits reduced by an amount reflecting a 3% after-tax profit on the diverted funds. Workers who earned exactly 3% on their individual accounts would break even; only those who earned more would profit.

In a paper published Thursday, the Institute for America’s Future, a liberal Washington think tank, looked at the effect on a 20-year-old worker who earned an average wage over a 45-year working life and retired in 2050.

Under current law, these workers are promised Social Security benefits of $22,000 a year (in 2005 dollars). According to the actuarial tables, they would collect it for 20.9 years, for a total of $460,000.

But the benefit cuts proposed by Bush would subtract more from that amount than the individual accounts would be likely to add back, the institute said, leaving workers with $375,000 in combined individual accounts and traditional benefits -- about a 20% reduction.

In another paper published Thursday, Jason Furman, a senior fellow at the Center for Budget and Policy Priorities, a liberal Washington advocacy group, observed that stock market investments are inherently risky. Their average annual rate of return may be higher than that of government bonds, he said, but that merely reflects investors’ demand to be compensated for additional risk.

“We are living in a time of excessive enthusiasm for the stock market,” Yale University economist Robert J. Shiller said in a recent conference call organized by the center. “The president’s proposal has support because people have a mistaken view of the outlook for the stock market.”

Since 1981, Shiller said, the Standard & Poor’s 500 index has gained an extraordinary 11.2% a year. He said those kinds of profits are unlikely to repeat in the new century.

But despite those warnings, some workers and retirees told the president Thursday that they would like to give personal accounts a try.

“I just wish I’d have had an opportunity to invest some of my own money 50 years ago,” said retired Army Reserve Maj. Gen. Lindsay Freeman. “I’d have been a millionaire.”

“That’s right,” Bush said. “He’s not kidding.”

Vieth reported from Hopkinsville and Havemann from Washington.