MSNBC: Bush Soc Sec Plan to cost you big

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Tue, 19 Apr 2005 21:05:11 -0700 (PDT)

 

 

MSNBC: Bush Soc Sec Plan to cost you big

 

 

 

MSNBC.com

 

This Bet May Cost You Big

The plan to reform Social Security will mean a double

cut in benefits. Returns from private accounts are

unlikely to cover both.

 

By Jane Bryant Quinn

Contributing Editor

Newsweek

 

 

April 25 issue - When the president argues for

privatizing Social Security, he hammers home a single

point: it's a better financial deal for the young. If

they all had personal investment accounts, they'd wind

up richer than if they stuck with the government plan.

Some unlucky people would fall behind, but not enough

to matter (and besides, " it won't be me " ).

 

But how many of the young (not to mention the

middle-aged) might fall on the " unlucky " side? A

larger number than you think. What's more, you'll be

getting a double cut in Social Security benefits—a

fact that the White House hasn't exactly advertised.

Investment returns from private accounts can

potentially make up for one of the cuts, but they're

unlikely to cover both.

 

Certainly, something must be done to square Social

Security's promises with the taxes the public is

willing to pay. Today's program is affordable in

something close to its current form, but not if tax

cuts and other spending matter more. Bush wants to

make his tax cuts permanent, at a long-term cost to

the budget that's triple the cost of making Social

Security solvent again (the estimates come from Social

Security and the Congressional Budget Office). So

we're talking priorities, not money: tax cuts versus

the safety net.

 

But what is this double cut in Social Security

benefits? First, there's a necessary cut to restore

the program to solvency. Then there's a second cut,

for people who opt for private accounts. Let me

explain:

 

The first cut occurs because, on paper, Social

Security is underfunded by about 25 percent over the

next 75 years. There are only two ways to fill the

gap—tax increases or benefit cuts. If " no new taxes "

holds, then benefit cuts become inevitable. Possible

changes include a higher retirement age and large

reductions in payments to future retirees. Private

accounts do not fix Social Security's insolvency

problem. But private investments appeal to hope.

They're also the honey that helps the medicine go

down. If you opted in, you'd split your normal payroll

tax two ways:

 

One part of your payroll tax would go toward a monthly

Social Security benefit, just as it does today. It

will be smaller than under present law, due to

whatever cuts are made to restore the program's

solvency.

 

The other part of your payroll tax would go toward a

private account invested in stocks, bonds or a mixture

of the two. When you retire, your annual benefit would

be docked by the amount of money you contributed to

your private account, plus 3 percent a year, plus each

year's inflation rate. For example, if you contributed

$1,000 with inflation at 3 percent, you'd lose $1,060

in benefits—your contribution plus 6 percent

" interest. " Over 35 years of $1,000 ontributions, your

promised retirement check might be reduced by roughly

half ($12,000 a year), says economist Jason Furman of

New York University. That's the second benefit cut.

 

 

What's the purpose of the second cut? To repay the

government for the money it borrowed to finance the

entire system of private accounts. You'd make this

fixed repayment whether your private account made

money or not. The gamble is that your investments

would rise by enough to offset the amount that's

subtracted from your retirement check, plus something

more.

 

What are the odds that you'd succeed? Yale economist

Robert Shiller looked at what you might earn if you're

21, save continuously for 44 years and retire at 65.

He used the returns from various types of U.S.

investments over every 44-year period since 1871. The

results surprised me. With money invested half in

stocks and half in bonds, young people would have

broken even or made money only 80 percent of the time.

Your odds of coming out behind were one in five. If

you played it " safe " by investing entirely in bonds,

you'd have lost money 89 percent of the time.

 

Your best choice would have been a fund invested

entirely in stocks, which showed losses only 2 percent

of the time. But that entailed a lot of risk. If the

stock market dropped in the year you retired, you'd

suddenly find yourself stuck with a lower income than

you'd counted on. If you'll depend on Social Security

to pay your basic living expenses, you shouldn't risk

private accounts at all, Shiller says.

 

At best, you're hoping that your private investments

will cover that second cut in benefits and make an

inroad into the first cut. Not even the White House

suggests that you'll earn enough to match the benefit

that the system projects today.

 

Is there a reasonable way of preserving something

close to current benefits? Yes, says a recent study by

the Employee Benefit Research Institute—and this

produced another surprise. EBRI asked what would

happen if today's payroll tax was extended to cover

higher incomes ($90,000 and up) and government workers

not now included in Social Security. Result: two

thirds of 20-year-olds—high earners included—would do

better than under the most common options for reform,

including private accounts. Social Security would be

solvent, too.

 

For young people, the choice boils down to this: pay

taxes today to guarantee yourself a better benefit. Or

pay less and gamble that you'll save enough not to

need it. For a nation of nonsavers, that's a risk.

 

Reporter Associate: Temma Ehrenfeld

 

© 2005 Newsweek, Inc.

© 2005 MSNBC.com

 

URL:

http://www.msnbc.msn.com/id/7528520/site/newsweek/

 

 

 

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Edmund Burke

 

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