The White House offered further explanation of President Bush's Social Security proposal yesterday, detailing how contributions to new personal investment accounts would be offset by dollar-for-dollar reductions in Social Security's guaranteed benefits.
Under the current system, retirees are guaranteed a monthly Social Security benefit check, based largely on years worked and payroll taxes paid into the system. Bush envisions a system in which workers could invest some of their payroll taxes in stocks and bonds, accumulating savings and investment returns in personal accounts that would be theirs upon retirement. In exchange, those workers would accept a smaller monthly check from the Social Security Administration.
Specifically, workers who opt for the accounts would lose a proportionate share of their guaranteed payment from Social Security, plus interest equal to the amount that money would have earned if the government had invested it in Treasury bonds. They would recoup those lost benefits through their accounts if their investments realized a return equal to or greater than the 3 percent earned by Treasury bonds currently held by the Social Security system.
The Washington Post incorrectly reported Thursday 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, White House officials said.
"Individuals get to keep everything they set aside in personal accounts, plus the increased rate of return they'll realize on their investment," White House spokesman Scott McClellan said. "So to suggest otherwise is wrong. It is the individual's account, and the government cannot touch it."
As details about the proposal emerged yesterday, the White House and opponents began sharpening their arguments for and against personal accounts. Opponents argued that reductions to guaranteed benefits that would accompany the accounts would render them all but pointless. Whether those reductions come out of retirees' monthly Social Security checks or out of their personal accounts "is a distinction without a difference," said Gene B. Sperling, a National Economic Council director in the Clinton White House.
White House officials responded that even if the accounts produced no more benefit than the traditional system, they would still be valuable.
"Even if I break even, we would argue I'm still better off because I own the money," a White House official said, speaking on the condition of anonymity. "If I die, it belongs to my estate. If I divorce, it's a marital asset. And it's protected from political risk. Government can't take it away."
It is still not clear how Bush's retooled system would work in total. The White House this week has chosen to discuss only a part of it, the private accounts. But those accounts will not close the projected $3.7 trillion gap between Social Security benefits promised over the next 75 years and taxes expected to be collected. That gap would have to be closed through benefit cuts that have yet to be detailed.
Here is how the personal account system would work under the Bush plan:
If a worker set aside $1,000 a year for 43 years, and earned 4.6 percent annually on investments, the account would grow to $221,552 in today's dollars. That money would be the worker's upon retirement and would probably be paid out in increments of $15,952 a year, according to calculations by the Center for Budget and Policy Priorities, a liberal advocacy group. A White House calculation showed a smaller payout.
But guaranteed benefits over the worker's lifetime would be reduced by approximately $151,990 -- the amount the worker would have contributed to Social Security but instead contributed to his personal account, plus 3 percent interest above inflation. The remainder, $69,562, 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. That sum -- expressed as an annual payout -- would total $5,008.
But that benefit gain could be substantially smaller. The Congressional Budget Office, Capitol Hill's official scorekeeper, factors out stock market risks to assume a 3.3 percent rate of return and then subtracts 0.3 percent for expected administrative costs on the account. 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 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 four 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.
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 the mechanism 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."
But opponents yesterday came out swinging. "This is like borrowing on a credit card to invest in the stock market," said Jason Furman, a former Clinton White House economist.