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What's the current push for Social Security reform really all about?
Will changing the system avert bankruptcy, or is the government using an elephant gun to slay an actuarial problem that might be just a gopher in the garden? Will reform strangle the beast of big government or point the future elderly toward a fiscal cliff? And will a new system empower American workers while promoting President George W. Bush's ownership society ideal or merely let workers fend for themselves?
Partisanship aside, answers are hard to come by. But this much is clear: The debate over this government-controlled retirement plan is all about risk and who bears it.
Shifting Risk from Government to Individuals
The Social Security Administration gives workers a feeling of security by sending them an annual statement that details their projected retirement and other government benefits down to the dollar. At some point in the first half of this century, when demographics make current payroll taxes insufficient to pay current retirees benefits, making up the difference is the government's problem under the existing system.
In President Bush's vision, a worker could opt to channel up to one-third of Social Security payroll taxes to a private investment account, made up of stock and bond-based mutual funds. Many details of the proposal have yet to emerge, but the privatized component would clearly expose American workers to stock market investment risks -- and opportunities. The risk of retirees coming up short would begin to shift from the government to individuals.
Many observers say the change wouldn't substantially increase the risks in the Social Security system. "I don't think a system including private accounts is riskier than the current system, with all its political vagaries," says Stanley Tomkiel, author of Social Security Benefits Handbook, Third Edition.
Over decades, Congress has changed the eligible age for full retirement benefits, the size of annual increases and so on, leading some to say there haven't been true guarantees under the current system. Others see the proposal as radical. Under the president's emerging plan, "someone who took the private account would have virtually no guaranteed benefit, so it's a tremendous additional risk," says Paul Krugman, a professor of economics at Princeton University and New York Times columnist.
Coordinating Retirement Benefits
Whatever Social Security reform is enacted, if it includes private investment accounts, workers will need to review their overall retirement strategies. This means coordinating management of Social Security benefits with any assets in 401k and IRA accounts, traditional pensions and other investments.
"You need to keep something in very low-risk assets," even if you've accumulated a lot for retirement, says Adam Apt, vice president of LTSave Inc., a Boston-based investment advisor for individuals. So depending on individual circumstances, it may make sense to channel all Social Security taxes to the old-style benefit program or to put a portion in the old program and the rest in a private account.
In plotting a retirement strategy, workers can solicit advice from the government, their investment managers, their employers or private advisors, each of which has its own interests and biases. "When the Social Security reform details are in, employers will figure out how it all fits together," says Sylvester Schieber, director of research and information at human resources consulting firm Watson Wyatt Worldwide in Washington, DC.
Will Privatized Social Security Remain Optional?
If private investment accounts are enacted, will they remain voluntary, as in the president's original proposal? "That's a political question," says Tomkiel. "It may eventually have to be mandatory."
It's also possible that a reform package will be structured to heavily favor Social Security investment accounts, even if they aren't mandated. "Plan 2 had a very strong inducement to take the private account; you paid a very substantial penalty to decline," says Krugman. Plan 2 is a reform proposal put forth in 2001 by the President's Commission to Strengthen Social Security.
However the Social Security debate unfolds, "this proposal will get people to start thinking about the future," Tomkiel says. Experts say that's a good thing for American workers, who are prone to taking the biggest risk of all: Robbing from tomorrow to pay for today.
