The Bush administration is pushing to make you responsible for investing some of your own Social Security dollars. While the outcome's uncertain...
The Bush administration is pushing to make you responsible for investing some of your own Social Security dollars.
While the outcome’s uncertain, many believe some measure of privatization may pass.
Consumers should know what’s at stake and how to evaluate choices that may be coming.
How private accounts might work
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Based on proposals being floated: If you’re under a certain age, you can opt to take a portion of the money you put toward Social Security and put it in an investment account. Sometimes referred to as a personal savings account, or private investment account, it would probably function similarly to a 401(k).
Ideally, you could choose several ways of investing, including methods with low return for low risk, or higher risk for possibly higher returns. Most likely vehicles: a handful of stock, bonds or mutual funds.
On retirement, you would either start making withdrawals or cash in all or part of your account in return for an annuity that would offer a regular fixed payment.
No one knows at present how much money you’d be allowed to invest. Probably it would be a portion of your contributions.
Eight questions about private accounts
1. Can you grow that money into something substantial?
“For some families, it would be a lot,” says Eric Tyson, author of “Investing for Dummies.” “But they have to keep at it year after year and need to harness the power of compounding interest.”
The more you have, the more you can make, but, “The fact is that most people — 72 percent of Americans — have portfolios of less than $50,000,” says Paul Farrell, author of “The Lazy Person’s Guide to Investing.”
“Most experts recommend a nest egg of $1 million, with an average 6 percent interest to generate $60,000 annually to safeguard a stable retirement,” he adds. “There is no possibility in the world that most boomers can throw off enough money to retire comfortably using private accounts.”
2. What provisions are there for inflation protection?
“The current system provides inflation protection. I’d want to know what happens in market downturns,” says Virginia Morris, co-author of “The Wall Street Journal Guide to Understanding Money and Investing, Third Edition.”
3. Who’s watching your money — and will they take your calls?
One article on the Social Security Web site projects an annual administration fee of one-quarter of 1 percent of the account, “which strikes a lot of people as extraordinarily optimistic,” says Morris.
One possible explanation, she says, is that fund managers would have a default arrangement that is 65 percent stocks and 35 percent bonds.
When the account reaches a certain size, the investor could then take over control, says Morris. The magic number: $10,000. But it’s not clear whether that’s in contributions or overall account value, she says.
What do you get for that fee? Will the manager, either a government entity or private company, help you manage your money?
4. What is the overhead of the new system?
The average mutual-fund fee is more than 1 percent annually. “Estimates are that these private accounts would be at least that much,” says Roger Hickey, director of the New Century Alliance for Social Security, a group of organizations fighting privatization. “Most people are going to have very small accounts. Those accounts could get eaten up by fees.”
5. What about homemakers?
There’s some question about dependents and women who don’t work outside the home, says Morris. “There is an option to put 50 percent in a spouse’s name, but not an obligation. And it’s women who have benefited the most from Social Security. I have no sense here that that is guaranteed or whether they would be covered in the traditional plan.”
One plus: “If you die before you begin to collect, your money goes into your estate tax-free,” says Morris. “Also the payouts are tax-free.”
6. Any guarantees?
The guarantee of a baseline or minimum payment is uncertain at this point, says Hickey. “Some proposals out there would cut your guaranteed benefit.”
In others, “if you invested in stocks, and your rate of return is not as good as you would have gotten under Social Security, the government would be required to make up the difference.
“Frankly, in the event of a dramatic stock downturn, we would be all clamoring for that kind of government bailout in any case.”
Others see less of a risk. “The vast majority of contributions will be in low-return, fixed-rate vehicles,” says Tyson. But some worry that promises of minimums aren’t realistic.
7. Who’ll manage the money?
And how will those companies be selected? Ideas being floated: The government selects one brokerage company, or several brokerage companies, or the government creates an entity that does all or part of the management itself.
8. Any provision for investment education?
Some professionals think such education would be necessary. “Most people are not good investors,” says Stephan Leimberg, CEO of Leimberg Information Services, which supplies legal information to tax professionals. “And it’s even hard for good investors.”