WashPost corrects earlier SS q&a

http://www.washingtonpost.com/wp-dyn/articles/A59136-2005Feb2.html

Correction to This Article
An earlier version of this article incorrectly described how new private accounts would work under President Bushs Social Security plan. This article has been corrected

Participants Would Lose Some Profits From Accounts

By Jonathan Weisman
Washington Post Staff Writer
Thursday, February 3, 2005; 1:51 PM


Under the White House Social Security plan, workers who opt to divert some of their payroll taxes into individual accounts would ultimately earn benefits more than those under the traditional system only if the return on their investments exceed the amount their money would have accrued under the traditional system.

The mechanism initially detailed by the Washington Post in today's editions and posted earlier on the Post's Web site was incorrect.

The original story (available here) should have made clear that, under the proposal, workers who opt to invest in the new private accounts would lose a proportionate share of their guaranteed payment from Social Security plus interest. They should be able to recoup those lost benefits through their private accounts, as long as their investments realize a return greater than the 3 percent that the money would have made if it had stayed in the traditional plan.

That 3 percent level is the interest rate earned by Treasury bonds currently held by the Social Security system.

The Post mistakenly reported that the balance of a worker's personal account would be reduced by the worker's total annual contributions, plus 3 percent interest. In fact, the balance in the account would belong to the worker upon retirement, according to White House officials.

"You'll be able to pass along the money that accumulates in your personal account, if you wish, to your children . . . or grandchildren," Bush said in his State of the Union address. "And best of all, the money in the account is yours, and the government can never take it away."

What Bush did not detail is how contributions in the account would reduce workers' monthly Social Security checks. Under the system, described by an administration official, every dollar contributed to an account would be taken from the guaranteed Social Security benefit, with interest.

"The person comes out ahead if their personal account exceeds a 3 percent real rate of return, which is the rate of return that the trust fund bonds receive," the senior administration official said. "So, basically, the net effect on an individual's benefits would be zero if his personal account earned a 3 percent real rate of return. To the extent that his personal account gets a higher rate of return, his net benefit would increase."

If a worker sets aside $1,000 a year for 40 years, and earns 4 percent annually on investments, the account would grow to $99,800 in today's dollars. All of that money would be the worker's upon retirement. But guaranteed benefits over the worker's lifetime would be reduced by approximately $78,700 -- the amount the worker would have contributed to Social Security but instead contributed to his private account, plus 3 percent interest above inflation. The remainder, $21,100, would be the increase in benefit the worker would receive over his lifetime above the level he would have received if he stayed in the traditional system.

Under the system, total benefit gains may be minimal. The Social Security Administration, in projecting benefits under a partially privatized system, assumes a 4.6 percent rate of return over inflation. Thus gains in an account would be offset by a reduction in guaranteed benefits equal to 70 percent of the account's balance.

The Congressional Budget Office, Capitol Hill's official scorekeeper, assumes a 3.3 percent rate of return. Under that scenario, the full amount in a worker's account would be reduced dollar for dollar from his Social Security checks, for a net gain of virtually zero.

If investments earned less than 3 percent a year above inflation, a worker would do worse in total benefits than he would have done in the traditional system.

In effect, said Democratic economist Peter R. Orszag of the Brookings Institution, the system works like a loan, in which the government grants workers 4 percentage points of their payroll tax to invest in stocks and bonds. The loan would have to be paid back with interest out of workers' monthly Social Security checks.

But Robert Pozen, an investment executive who served on the president's 2001 Social Security Commission disputed that characterization. A worker is simply paying less into the system so he gets less back.

"This is in no way a loan," Pozen said.

Supporters say the system is far better than what had been incorrectly described by the Post. Between withdrawals from a personal account and a Social Security check, total benefits would be the same, whether the loan repayment comes from the account or from the guaranteed benefit. But by leaving the balance of the account untouched, the White House would impart a sense of ownership in the economy, said Stephen Moore, a conservative Bush supporter and author of a book on the president's ownership society.


© 2005 The Washington Post Company

http://www.washingtonpost.com/wp-dyn/articles/A61414-2005Feb3.html

Questions and Answers

By Glenn Kessler
Washington Post Staff Writer
Friday, February 4, 2005; Page A08


In his State of the Union address Wednesday, President Bush outlined his plan to add individual accounts to Social Security, the venerable old-age retirement system. Bush's case for change has been attacked by Democrats as alarmist and unbalanced, and many questions about the president's plan remain unanswered and subject to negotiations with Congress.

Social Security, created in response to the pervasive poverty during the Depression, is designed to provide workers with a basic level of income in retirement, as well as disability and life insurance while they work. The benefits are progressive, meaning lower-income workers get a relatively better deal than higher-income workers; however, workers making above a certain salary ($90,000 this year) do not have to pay Social Security taxes on any income above that level, which means they put a smaller proportion of their earnings into the system. .

<snip>Can I borrow the money invested in the accounts?

No. You have no access to it until retirement, just like under the current system.

What happens when I retire?

Upon retirement, workers would be required to trade in their investment portfolios for an annuity so that a combination of traditional benefits and their annuity payments would meet the poverty level, which was about $11,400 for a couple older than 65 in 2004. But if that income stream is higher, under Bush's proposal, retirees could use the additional money in their accounts as they wished, such as continuing to invest, increasing the size of the annuity payment or taking a lump-sum payment.

What happens if you die shortly after you have bought the mandated annuity?

That money is lost, just like in an annuity purchased in the private market.

They both still read the same to me at least in the details. The second one is so full of spin it is hard to read and digest.

:-)