In the second year of implementation, the opportunity to invest in the personal accounts would be extended to those born in 1978 and earlier. And then in the third year of implementation, all eligible workers would be able to participate in personal accounts if they chose.
There's a couple of reasons for this. One is, in order to ease the administrative transition to personal accounts -- we don't want to do it for the whole work force all at once, but we want to phase it in. Secondly, when it comes to phasing in participating, we think it's more important to start with the workers who are closer to retirement. If they were held back in the phase-in process, obviously, they have fewer years to elapse between the point of investment in the account and the time they'd be claiming retirement benefits. So if they were to miss years during the implementation lag, they'd be missing one of a smaller number of potential investment years. So we think it's important to start with the oldest workers, enable them to be in the personal accounts earlier, and then gradually phase down to the younger workers.
The size of the personal accounts would be limited to 4 percent of a worker's wages from their payroll taxes. But there would be a cap placed on the accounts in the first year -- contributions to the accounts of $1,000. Now, each year that cap thereafter would rise in increments of $100 on top of the natural wage growth that drives the growth in payroll taxes. And what that means is that over time, more and more of the work force would be able to contribute the full 4 percent of their wages to the personal accounts.
We thought it was very important to start in the early period with the full 4 percent, rather than phasing up the percentage. This is very important to low-income workers to make sure that they get appreciable gains from the accounts. If we started out with a lower percentage, the potential dollar gains for low-income workers would be that much more limited. So instead of phasing up the percentage, what we're doing is starting by phasing up the cap of $1,000 and starting with the full 4 percent.
With respect to the fiscal effects of the personal accounts, in a long-term sense -- and I know those of you who have talked to me have heard me say this before -- but in the long-term sense, obviously, the personal accounts, as we would structure them, would not create a net new cost for the system. To the extent that people put money in these accounts and invest in these accounts, there would be a corresponding reduction in the government's liabilities from the Social Security system that is equal in present value to the money placed in the personal accounts up front. So in a long-term sense, the personal accounts would have a net neutral effect on the fiscal situation of the Social Security and on the federal government.
I would hasten to point out that this is distinct from something like an add-on account, where under an add-on account you actually would have a net new cost because you would have -- you would require resources up front to fund the accounts, but the accounts, themselves, would be creating additional -- or would be a part of an additional program or additional obligations on top of the current Social Security system, rather than addressing existing obligations. So an add-on account would add to the net cost of the system, but the accounts as we are envisioning them would actually be no net cost for the system over time.
In the near term, however, of course, there will be transition financing required. Our estimate of the total amount of transition financing for the accounts, according to the schedule that I've outlined before, is about $664 billion through the end of the budget window of 2015. If you assume that -- debt service effects on top of that, that would be another $90 billion.
I think that's the end of my specifications on the account details. I'd be happy to take any questions. And again, I thank you for your attention. And I'm going to have to come up with a system for choosing who gets to ask the first question.
QUESTION: The life cycle accounts -- did you say that they are not offered yet under the thrift savings plan, but they would be under these private accounts?
SENIOR ADMINISTRATION OFFICIAL: That's right. TSP is coming forward with the life cycle fund. It's a new fund under TSP.
QUESTION: When does it start, do you know?
SENIOR ADMINISTRATION OFFICIAL: I don't know the precise date. It's soon. I mean, they've already sort of debuted it and talked about it in the public space. But I don't think it's yet available.
QUESTION: And the administrative fees that you talked here, how does that compare with out in the private sector?
SENIOR ADMINISTRATION OFFICIAL: They're considerably smaller. These are 30 basis points. The private sector tends to be higher. It's not quite as low as the thrift savings plan now has. The thrift savings plan, by different estimates, is about 6 or 8 basis points, reflecting the fact that the thrift savings plan only has to administer the accounts of employees of the federal government. So the Social Security actuaries' estimates are a little bit higher than for the thrift savings plan, mostly from a record-keeping perspective. There wouldn't be any increase in the cost of things like fund management and other things that are controllable by economies of scale.
QUESTION: So if I had $100, I'm paying 30 cents? Is that correct?
SENIOR ADMINISTRATION OFFICIAL: That's right.
QUESTION: Will the kinds of accounts available to participants in this program directly mirror those that you described as now part of a TSP?
SENIOR ADMINISTRATION OFFICIAL: 'Directly' is a slightly loaded adjective. I mean, there would be obvious parallels and many similarities. There would be some respects in which it would be inherently different, obviously, because...
QUESTION: Would there be the same number of accounts available, and would they, in general terms, reflect those that are now available under TSP?
SENIOR ADMINISTRATION OFFICIAL: They wouldn't necessarily stay in the same number forever. As this new system got up and running, you're going to have more participants and a greater aggregate amount of investment than is in the thrift savings plan. And I think over time what you would see is similar types of funds, but probably a larger number of funds, so as to prevent a concentration of too many assets in any one particular fund.
QUESTION: At the beginning of this program, what funds would be available to people?
SENIOR ADMINISTRATION OFFICIAL: It would be very similar to TSP. I think the five funds in TSP are a reasonable guide to what we'd be starting with.
QUESTION: You talked about the $664 billion for the near-term costs. There's been a lot of speculation in advance that it would be something like $2 trillion. Talk a little bit more about that. How do you square that?
SENIOR ADMINISTRATION OFFICIAL: I don't want to say too much about it. Obviously, the $2 trillion number is not a number that was ever generated by us or by the Social Security actuaries, or any of the other nonpartisan scoring agencies. There were different assumptions that went into that number, and they reflected, I think, the thinking of other people beyond the scoring agencies.
The number that I read here is impacted by a couple of things. It's impacted by the timing and the implementation of the personal accounts, our phase-in schedule for participation in the accounts, and the actuaries estimates of total participation in the accounts at the end of the phase-in period.
QUESTION: Can you talk about over periods of time what an average rate of return is on some of these accounts, and under TSP, if you will? I'm not sure how you equate that...
SENIOR ADMINISTRATION OFFICIAL: Well, actually, the TSP publishes their rates of return -- if you go to tsp.gov you can look them up. The C-fund has a 10-year average rate of return of roughly 11 percent. The G-fund is around 6 percent. The S-fund is 9.7 percent -- that's the small cap fund. That's the historic information on the TSP fund.
Now, the Social Security actuaries make their own estimates about the portfolio returns on personal accounts. And those tend to reflect an assumption of a blend of 50 percent equities, 30 percent corporate bonds and 20 percent government bonds. And when they put all that together and subtract out administrative costs, they come up with a 4.6 percent above inflation. It's 4.9 percent before the administrative costs, and then 4.6 percent after. That's the actuaries portfolio assumption. And when you're scoring plans you're usually just bound by the actuaries' assumption, but that's their intermediate assumption.
QUESTION: How do the personal accounts guarantee permanent solvency for Social Security?
SENIOR ADMINISTRATION OFFICIAL: Well, we talked about the personal accounts being in the context of an overall plan to create a permanently solvent Social Security system. What I've laid out here are details of the administrative structure of the personal accounts. The larger question of the comprehensive plan to fix Social Security permanently is really subject to the details of discussions between the president and members of Congress.
QUESTION: Well, is the president going to talk about any benefit cuts that may be necessary to close the funding gap that's going to occur over the next 75 years...
SENIOR ADMINISTRATION OFFICIAL: I think the way I'd answer that -- obviously, the first part of the answer is you'll know soon enough how the president puts it forward. But I think the president is going to make it very clear that -- there won't be any doubt after the president speaks tonight that we do need to step up to the plate and make choices to fix Social Security's finances. I think his general attitude has been one of openness and engagement and a willingness to keep a lot of different ideas on the table. It probably wouldn't be appropriate for me to discuss the merits or demerits of any particular option for fixing Social Security's finances, beyond I think just saying the president is going to make it pretty clear tonight that a wide variety of measures will be on the table for doing that.
QUESTION: But don't you think it's going to be inevitable that Democrats and others will try to clobber you on the idea that you've put out what you perceive as the easy, good news and here's the accounts, but not tell people, here's what's needed to be done as far as what some people call future promised scheduled benefits and so forth? Would you acknowledge that you've basically not made the hard choice on that today?
SENIOR ADMINISTRATION OFFICIAL: Well, I would be delighted if everyone agreed that the account announcements were really good news. And we obviously think it is. But, again, I'm not sure that the premise of the question necessarily holds because I think the president is going to be, I think, very clear about the need for everyone to work together to make the choices necessary to fix the system.
QUESTION: But as Claire and your colleague said yesterday, the president is going to show leadership and no doubt and so forth -- what would you say to those who would say it's not leadership to basically not make the hardest choice, which is to tell people future benefits now scheduled won't happen; this may not be a net gain, even with the private accounts? So how would you respond to that?
SENIOR ADMINISTRATION OFFICIAL: Well, I think the president is certainly going to speak very forcefully and very truthfully both tonight and in upcoming days about the nature of the gap right now between what the current system has promised and the benefits that it can actually deliver. And I think in signaling his willingness to deal with that, he's setting an important tone for working with Congress in the weeks ahead. To the extent that we can -- if Congress is willing to join in that message, we think that advances the ball forward considerably.
QUESTION: If I could follow up on a couple of questions that have already been asked -- can you give us a second 10-year estimate on the revenue effect? Can you tell us how you would pay for that, in the first 10 years' revenue loss? And am I right in assuming that in the way you describe this, because it's a wash in terms of the net effect on Social Security from the accounts by themselves, that it would be fair to describe this as having -- the personal accounts by themselves as having no effect whatsoever on the solvency issue?
SENIOR ADMINISTRATION OFFICIAL: On the second point, that's a fair inference. On the first point, the long-term picture, of course, as you know, is very -- it's a very comprehensive picture. You're looking forward 75 years over all time, depending on how you gauge things. And that can only be done accurately in the context of a comprehensive plan to fix the system. For example, if we were to do projections out beyond 2015, we would have to model what were the hypothetical changes made to fix the system's finances, which are at this time yet undetermined.