The way Social Security operates is that current benefits to retirees and the disabled are paid by current payroll taxes from individuals and their employers. If people are allowed to divert a portion of their payroll taxes from the system to their own accounts, there will be less money coming into the government to cover those current benefits, which Bush has promised to pay in full.
Bush says the accounts would cost about $754 billion over the next 10 years. This might be true, but only because it is based on the program starting in 2009 and being fully implemented in 2011. The costs skyrocket when the new accounts are open to all. Senate Minority Leader Harry M. Reid (D-Nev.) says that it will cost $4.9 trillion over a 20-year period, starting in 2009.
Vice President Cheney recently said the accounts would cost "trillions of dollars," which is probably the most honest, if vague, estimate, budget experts said.
Bush Claim: Personal Accounts Offer Greater Returns
"Young workers who elect personal accounts can expect to receive a far higher rate of return on their money than the current system could ever afford to pay them," Cheney told an audience at Catholic University last month. "For example, if a 25- year-old invested $1,000 per year over 40 years at Social Security's 2 percent rate of return, in 40 years she would have over $61,000. But if she invested the money in the stock market, earning even its lowest historical rate of return, she would earn more than double that amount -- $160,000."
That calculation is based, however, on the premise that taxes paid into Social Security somehow have a fixed rate of return correlated to Treasury bond interest rates.
Instead, the rate of return in the current system is the product of complex formulas based on years worked, wages earned, the rate of wage increases over a worker's lifetime and inflation rates during retirement. Social Security offers low-wage workers a higher benefit relative to their tax payments than higher-wage earners get.
According to a government actuary, a low-wage woman whose earnings rose over her career and who retired in 1985 will receive lifetime Social Security benefits equal to taxes paid into the system, plus 5.17 percent above inflation -- a rate of return more than 2 1/2 times the 2 percent Cheney cited. A married couple with one wage earner would gain 7.38 percent. An average-earning single man who retired in 1985 will earn only 2.81 percent over inflation above what he paid into the system, a single woman, 3.74 percent.
Such rates of return, however, will decline as the number of retirees rises relative to workers. A low-wage, single man retiring in 2029 could expect to get back what he paid in, plus 2.86 percent over inflation. An average female worker would get a 2.28 percent return on her investment.
For virtually everyone, those future rates of return would fall below the 4.6 percent gains the government actuary anticipates for money that would be invested in personal accounts under Social Security. But under the administration proposal, anyone investing in the accounts would lose 3 percent of their gains to help finance the new system. So beating the current system is not a sure thing.
Democratic Claim: Plan Would Benefit Wall Street
Citing a study by University of Chicago economist Austan Goolsbee, Reid and many other Democrats argue that New York money managers will profit handsomely if millions of Americans start investing their payroll taxes in stocks and bonds.
But Goolsbee's study assumes a much higher cost to administer personal accounts than the Social Security Administration and many others do. If Bush sticks to the guidelines he conveyed to Congress, the federal government would manage the accounts centrally, and fees would total about 30 cents on every $100 for account holders, less than most Americans pay to maintain their mutual funds today.
Bush supports offering only a small menu of stock and bond indexes to choose from, which probably would limit the number of transactions people make and therefore hold down administrative costs.
"It certainly does not appear something Wall Street would salivate over in terms of fees," said Robert Bixby, executive director of the Concord Coalition, a bipartisan budget watchdog group.
Bush Claim: Personal Accounts Offer Individuals Greater Freedom
"It's your money," Bush told thousands of supporters recently at the University of North Dakota. "It's money you can decide to leave to whomever you want." This is partly true.
Under the current system, retirees and the disabled collect a monthly check based in part on lifetime contributions. When they die, so does their claim to the money they paid into the system. The Bush plan would, for the first time, allow individuals to bequeath the money stored in personal accounts.
But there is a hitch. To prevent people from emptying their personal accounts at retirement, Bush would require everyone to either purchase an annuity, which creates steady income until death, or set up regular payments from the account to maintain an income that exceeds poverty. If people fail to make a choice, the government would automatically enroll them in an annuity.
And annuities die when a person dies, so that money could not be passed on.