Discuss the implications of the changes to the current Social Security program here. This blog is devoted to a non-political discussion of the various proposals. You will find information, about how the proposals affect you. However, you will not find information about the effects of the proposal on the deficits, or whether the proposal is good or bad or politically motivated or whether the Social security system is likely to stay solvent in 2042.

Wednesday, February 09, 2005

Social Security Benefit Calculators

Social Security Administration

Calculate your benefit under the traditional social security plan, by using this calculator.

The Heritage Foundation

The Heritage Foundation has a calculator that computes the benefits under the traditional and the proposed systems. It factors in your zip code, retirement age, gender, income and other factors. Check it out here.

National Center for Policy Analysis

This calculator assumes that you invest 10.6% of your payroll taxes into your personal investment account, beginning at age 21. The model portfolio has 60% stocks and 40% bonds and returns 5.4%. It calculates future earnings using census data. The calculator is located here.

Institute for Women's Policy Research

Check out this calculator, which assumes that two percentage points of your payroll tax will be used to fund your private account. The calculator assumes that your portfolio is divided between 60% stocks and 40% bonds for a 5% rate after inflation and 4% after fees.

Monday, February 07, 2005

The Social Security Proposals : Q & A

How does the proposed system differ from the current Social Security program?

The current system pays benefits on a monthly system, for life. These benefits are based on the worker's wages. Under the new plan, participants can opt to put a portion of their social security taxes into an investment program. Upon retirement, the individual is eligible to receive a certain amount from the Social security system and can withdraw a portion of his investment, from his investment program.

Where is the money invested, in the proposed system?

Individuals shall be able to setup personal accounts and a portion of the SS taxes shall be diverted into these accounts.

What are the likely fund choices?

Some of the options available may be:

  • Government Securities Fund

  • Fixed Income Fund

  • Small Cap Stock Fund (Eg. Wilshire 4500 Index Fund)

  • Large Cap Stock Fund (Eg. S& P 500 Index Fund)

  • International Stock Fund (Eg. EAFE Fund)

  • Lifecycle funds
  • (Five)

Can an individual rebalance his/her portfolio?
Yes. However you can rebalance your portfolio only once per year.

Current proposals allow for investments of upto 4% of a worker's annual wages. However, in the initial phases, it is unlikely that individuals will be allowed to invest the entire 4%.

How much money can I invest in this account?

Current proposals allow for investments of upto 4% of a worker's annual wages. However, in the initial phases, it is unlikely that individuals will be allowed to invest the entire 4%.

Workers currently pay 6.2% of wages into Social Security and the employer pays another 6.2%, for a total of 12.4%. If I can invest 6% in a personal investment account, what happens to the remaining 8.4%?

The 8.4% of the workers wages will be invested in the current system.

What is the maximum amount, that I can save in my personal investment account, per year?

You can save upto 4% of your annual wages, upto an annual dollar limit of $1000.

Will the contribution limits over time?
Yes. Contributions may increase by $100 per year. Further, they may be indexed to inflation or wage growth.

What are the investment choices available to an individual who has opted into this program?

The investment choices have not yet been determined. However, the choices will tend to be fairly conservative bond funds or index mutual funds.

Who is likely to adminster the program
The Social Security Administration shall adminster the program.

Which financial services provider is being tapped to manage the various funds?
No financial services provider has been mentioned yet. However, any provider chosen, will have to provide services at a low cost and make up the profits on volume. Firms experienced with providing low cost options include State Street Securities, Barclays Global and Vanguard.

What are the fund management expenses, that I can expect to incur?

The administrative costs may be around 0.3 percent or 30 cents for each $100 invested. This expense shall be shared between the Government and the financial provider.

When is the plan likely to go into effect?
If Congress approves the current proposal, the plan may go into effect in 2011.

I am 60 years old. Can I participate in the proposed plan?
Only workers younger than 55 will be able to particpate in this program.
Starting 2011, only workers born after 1949 will have the ability to opt into this program.

I was born in 1964. When can I enroll in this program?
If you were born between 1950 and 1965, you can participate starting in 2009.

When can I wife, enroll? (She was born in 1970)

Workers born before 1979 can participate in 2010.

What happens to the funds in the personal investment account, upon retirement?

After you retire, you will have the option of turning in the amount in your account, in return for an annuity. The annuity payments would be designed so that the combination of traditional benefits and the annuity payments shall meet the poverty level, which was about $11400 in 2004, for a couple older than 65.

Can an individual withdraw the entire money in his personal investment account, after retirement?

You can withdraw a portion of your money. However, you have to leave enough money in your account that shall be sufficient to buy a lifetime-income annuity, which when combined with social secuiry benefits shall generate sufficient income to keep the individual above the poverty level.

Current proposals allow for investments of upto 4% of a worker's annual wages. However, in the initial phases, it is unlikely that individuals will be allowed to invest the entire 4%.

What are the choices available to a worker, who decides to opt-in to the new program, but upon enrollment, concludes that investments are not his cup of tea and he should have chosen to stay within the previous system?

The worker can invest his money in Treasury bonds, which is the investment vehicle for the current Social Security System. The bonds currently earn about 3 percent a year.

What is the rate of return, that I must achieve, to ensure that I come out ahead of the traditional system?

The Social Security program invests in Treasury bonds, which earn about 3 percent a year. If you opt for individual accounts, you stand to gain, if your rate of return is more than 3% a year and may lose, if the return falls below that number.

My friend Joe is below the poverty level. Can he choose to invest in the Personal Investment Account?

If Joe's income in retirement is solely from Social Security and if this income is likely to place him below the poverty level, then he shall have to use the entire amount in the personal account towards buying an annuity. The annuity would in turn pay out a monthly payment for life (similar to the traditional social security system).

Can the government take money out of my personal investment account?

The probability of the government dipping into the personal investment accounts is low. However, the government can reduce the amount of benefits from the traditional system, if it finds that individuals have windfalls in their private accounts.

What happens to the money in an individual's Personal Investment Account after his death?

The individual's heirs shall have access to the amount.

Sunday, February 06, 2005

Social Security reform and your future

Miami Herald

Social Security has to change, President Bush said in his State of the Union address last week.

If you're not already retired, you're the one he's talking to. This will be a major issue for your personal financial future.

If you're younger than 55, the President would allow you to take on more of the responsibility of saving for your retirement through private investment accounts. They're voluntary. If you use them, you will get a smaller Social Security benefit from the traditional system.

For those not interested in taking on that risk, the question is, what's going to happen to your benefits?

The answer is not clear.

There's plenty of trouble ahead for what has been the nation's retirement security, the government's largest program and our best safety net.

The issue facing policymakers is how to pay for these benefits, when our payroll taxes no longer cover the cost of benefits for current retirees, the disabled and survivors of deceased workers.

Social Security will start running out of money in 13 or 15 years, depending on which estimate you prefer. There just isn't enough money being paid in and too many retirees, including Baby Boomers, will be taking benefits out.

That moment will arrive just when people who today are in their 50s will become eligible for full retirement benefits.

The choices at that point will be difficult for Congress. It can help out with the Social Security system's needs by raising taxes, borrowing money, cutting benefits, or chopping into other areas of the federal budget.

The President's plan won't change the need for that.

It simply shines the spotlight on it and opens up the discussion.

Even the President isn't quite set on how to reform Social Security.

He has said he's open to ideas. He has not put his private account plan into the form of legislation. You won't find the details on the White House website.

What we know is, Bush wants to offer younger workers a sense of control of their money. His plan would allow those born after 1949 to put up to 4 percent of their pay, up to $1,000, into private accounts, starting in 2009. That would cut into the 6.2 percent that most workers currently pay into Social Security.

When this group retires, they'd be required to put a certain amount from their accounts into an annuity -- which will guarantee them payments for life.

They will receive Social Security benefits, too, but that check will be smaller than the benefits offered to someone who stayed in the traditional system. It's expected that benefit cuts will be roughly one dollar for every dollar put into the personal savings accounts.

Is it smart to go this route? The answer: It is a gamble. You are betting that your investments will do better than what you would have received from Social Security.

Yet these accounts aren't supposed to be aggressive. They're supposed to be in what Bush has called a conservative mix of stocks and bonds.

It is clearly going to be expensive for the nation. The estimated cost to handle the transition and first year of private accounts will be $754 billion. That's in part because revenues to Social Security will fall as some workers shift money out of the system, but benefit payments would remain at the current level.

For those who don't want that risk, the President has not yet said whether those who stay in the traditional system will get the same level of benefits they expect today. Or whether eventually, benefits will have to be cut for everyone.

The burden of the change to private accounts -- if it happens -- would be heaviest for those nearing retirement.

Today's 50-year-olds, if they choose the private account option, will only have 11 years beginning in 2009 to sock money away before they reach the age of full retirement benefits.

They won't be able to shovel much money into their accounts, either. That $1,000 annual limit will go up, but only by $100 a year plus some measure of wage inflation.

That compares to a 27-year-old today, who will be eligible to open a private account five years from now, under the Bush plan. That would give the saver 35 years to accumulate money before reaching full retirement age of 67.

If he or she put $75 a month away faithfully and earned a 5 percent return, there would be $85,562 at retirement.

For 55-year-olds, who are just seven years away from being eligible for early retirement benefits, the President said in his State of the Union address last week that there will be no changes.

''I have a message for every American who is 55 or older: Do not let anyone mislead you,'' he said. ``For you, the Social Security system will not change in any way.''

Ditto for those already in the system. ''For current retirees, this is not fundamentally an issue of their personal finances,'' Douglas Holtz-Eakin, director of the Congressional Budget Office, said in a telephone interview.

However, today's younger workers will find their situation to be complex.

Take a 25-year-old.

If nothing changes, the system won't be able to pay full benefits when he retires.

Or, ''Under the President's plan, they can look forward to essentially paying all their taxes and getting maybe half their benefits,'' Professor Laurence Kotlikoff from Boston University said in a telephone interview. Kotlikoff was an economist in the Reagan administration and he is a research associate with the National Bureau of Economic Research. ''It's fiscal child abuse,'' he said.

Benefits will be cut far in excess of the $1,000 that younger workers will be allowed to set aside in private accounts, he expects, using calculations laid out in the recent National Commission on Social Security Reform.

Social Security reform: What about middle-aged workers?

Sunday News Staff

The seniors are assured their Social Security benefits are sacrosanct. And the President says the kids are all right because their personal accounts are voluntary and will outperform the government’s 70-year-old retirement system anyway.

But what about the great mass of middle-age folks? What effect will President Bush’s effort to save Social Security have on workers in the 35-to-54 age bracket?

It won’t be good, says one noted Granite State economist, and that could have a profound impact on the state because there are so many of them here.

“New Hampshire ranks second highest among the 50 U.S. states in percentage of population between 35 and 54,” according to Ross Gittell, professor of management at the University of New Hampshire.

“One third of all residents fall in that category,” he said.

“The President’s proposal is structured in such a way that these people will be able to invest in private accounts but they lose the security of the current system that the older population has, and don’t have the time” to develop the substantial investment portfolio people in their twenties will have the time to build, Gittell told the Sunday News.

“Therefore it could have a relatively strong effect in New Hampshire.

“Now the younger generation is supporting the older generation’s Social Security income,” Gittell said, “but if we are not supporting the Social Security system and there is a deficit in funding, if current workers are going to private accounts, those funds will not be available for retirees.”

Unresolved details

While other analysts interviewed last week did not raise that concern, questions about the viability of the President’s proposal to partially privatize Social Security elicited more questions in return. An attitude of “we don’t know yet” pervaded the responses.

“I am not against privatization, per se, but I think there are a lot of issues related to it that need to be addressed to make it a fair and appropriate change,” Gittell said.

The President in his State of the Union address last week assured the over-55 crowd that, although they will not be eligible for the personal accounts, they will continue to receive the traditional Social Security checks without fear of reduction. And Bush explained to the people in their twenties that they would have years to build up a substantial investment portfolio.

But the group in between, the baby boomer generation, has a smaller timeframe to amass a large investment and lacks the assurances that their traditional Social Security benefits will go untouched.

Presented with this question about the middle-aged workers, Gittell and financial consultants Paul Pouliot of American Express Financial Advisers in Bedford, and Tom Sedoric of A.G. Edwards in Portsmouth gave mixed answers and, in return, raised more questions.

But a New Hampshire senator who has been in the forefront of Social Security reform efforts believes change is crucial, and that the middle-age group will benefit.

Ensuring solvency

Sen. John E. Sununu, whose bill parallels the concept Bush is putting forward, expressed confidence that the 35-54 age group would be well served by the revision to allow for personal savings accounts.

“If a 42-year-old invests $1,000 annually into a personal savings account, he will have $25,000 plus interest when he retires,” Sununu said. “And if, at 42, they want to work for an additional 40 years,” as opposed to retiring at the age of 67, “they would accrue more benefits,” he said.

“But this is a program that will help ensure solvency in the Social Security system for future generations,” Sununu said. “The greatest benefits will be to my children and grandchildren.”

The selling points

The major selling points of the personal accounts in both the President’s and Sununu’s proposals are the opportunity for wage earners to accrue interest at around 6-8 percent annual rates from a portion of the Social Security to live on after they retire, and the belief that the popularity of the accounts will attract enough activity to save the Social Security fund from the collapse they are projecting without the accounts.

Sununu’s Senate bill, the Social Security Personal Savings Guarantee and Prosperity Act of 2004, and an identical companion bill in the House, were still in committee when the 108th Congress adjourned. Sununu said he will re-introduce his bill before the end of this month.

Sununu’s bill will be deliberated in the Senate Finance Committee, along with the corresponding House bill and the President’s proposal. Differences between the proposals will be worked out in conference. Sununu hopes the legislation will pass by the end of 2005.

“The personal accounts, which are in my bill, I believe would be a centerpiece of that bill,” said Sununu, referring to the final document.

Will the Social Security reform legislation pass?

“The President has been successful with every initiative he has pushed — the 2001 tax cuts, bipartisan education reform and Medicare prescription drugs legislation,” Sununu said. “The odds are in his favor.”

Gittell, of UNH, said the concern for the “middle-year” age population is particularly relevant in New Hampshire.

“On the other hand,” Gittell said, “there could be benefits from people having the other option, to invest in assets that have more risk but greater return potential.”

Upping the cap

Gittell said he felt the way to overcome those problems is to increase the cap on annual wages from which Social Service payments are deducted and added to the fund — from $90,000 to $200,000.

“People are guaranteed that they will have a certain level of support and quality of life no matter what happens,” Gittell said. “You could have both if they would move up the cap.”

But Gittell wasn’t optimistic that such a cap increase would happen. “The tax would take away from some luxury consumption,” he said. “And I think that this is not likely because the higher income group is more influential and are likely to resist this.”

Gittell said the key to success of the proposed Social Security system is education, beginning in the elementary school, so that people will understand the financial markets, including the risks and investment strategies.

He dismissed a suggestion that some people may never feel comfortable participating in such a system, saying that as an educator he believes anyone can be taught.

“I am confident that people’s ability will be enhanced over time, but we have to start at a very young age,” Gittell said.

Time frame fine

Pouliot finds the prospects of the 35-54-year-old age group promising.

“I think the middle group will be getting a better deal,” he said. “If you are 45, it’s a wonderful time frame to have your investments work over.

“You can expect to outperform what the traditional Social Security would yield. The growth rates are very limited on Social Security,” Pouliot said. “Last year there was a less than 1 percent growth rate.”

Pouliot said, “Your time horizon is pretty good, but you have to start doing something pretty quickly.

“Under 55 will have the option but, whoever stays in, if we get to the point of insolvency decisions will be forced on us, either reduced benefits or some people will be taxed more on the proceeds. I’m not sure how anybody can forecast guarantees on that.”

Managing the account

Pouliot raised the issue of private vs. government management of investments.

“Everybody would get a minimum level of Social Security” under the plan, Pouliot said, “but the question comes down to whether we can more effectively manage the other part than if we give it to the government to manage.” Prudent investment rules and historic performances prove that the answer is yes,” Pouliot said.

“There is a great opportunity for individuals to be more proactive and end up with better results than with the current system.

“Be proactive, don’t panic in down markets and don’t get overconfident in good markets,” Pouliot said. “The concept is really to try to encourage individual action and to be responsible for your own affairs.”

Regarding the prospect that the government could select a small number of money management firms from which Social Security participants may choose to manage their personal accounts, Pouliot said, “If we get the government back in and dictating who will manage the account, that comes at some price and some inefficiency.”

But Pouliot said he liked the concept of the President’s recommendation. “But that is conceptual, and what it will look like” in the long run “is of greater importance.”

Selecting the right risk

Sedoric, of A.G. Edwards, also had concerns about the plan’s attractiveness and participants’ ability to manage it. “If you look at participation in elective 401-K plans, it is pretty low,” he said.

“Some studies have indicated that the assets that people invest in are misallocated; in other words taking too little or too much risk,” Sedoric said.

“What’s different is that if the government forces a deferral, you automatically would enhance participation and therefore the burden to educate about choices will fall someplace.”

Sedoric also sought clarification of the roles of the various players in the personal account configuration.

“How would it affect a company if the biggest shareholder would be the federal government,” Sedoric posed. “Who would elect the board members? Who would the shareholders be — the government, the money manager, or the individual who owns the account?

“Well, it’ll all come out in the final wording of the legislation,” Sedoric said. “The devil is in the details.”