Show Me the Money

President Bush is waving the carrot of private Social Security accounts in front of millions of Americans who, perhaps too young to remember what happened to stocks five years ago, still think they are going to get rich quick in the stock market.

If you could just take some of that money that Social Security drains out of your paycheck every week, he says, and put it in a private account where you could invest in stocks, how much better off you would be when you retire!

Or would you? This is a case where it really helps to read the fine print. Although President Bush hasn't announced a comprehensive plan, he did have a "senior White House official" spill some details of the plan just before his State of the Union address.

One of the details: the money that will go into the private account isn't really yours. At the end of your working career you will have to pay it all back to the government. Plus interest: at the rate of U.S. Treasury notes.

The difference between what you made in your private account and what you have to pay back, with interest, is your "profit" – or loss. But that's not the end of the story. There are administrative costs that will reduce your accumulation by another 5 percent (according to the President's Commission to Strengthen Social Security). Or possibly a lot more: in a typical private 401 (k) account it's about 3 times that much.

You're still not home free. The President's plan will require you to convert some or all of your accumulated sum to a lifetime annual payment. But the cost of this conversion is not cheap: in the private sector it is 10-20 percent of accumulated savings; if the government does it maybe it can be kept to 5 percent.

Now let's do the numbers: say you are a 27-year-old worker with average wages when the plan takes effect for you in 2011. Assume that you put the maximum allotted amount into the private account. Let's also assume that the administrative costs, and the cost of converting the lump sum to an annual payment, are the cheapest imaginable.

When you retire after 40 years, your combined benefit from the private account and the traditional Social Security system will be $1,371 per month. This compares to $2,127 that the current Social Security program, if left alone, has promised to pay.

Supporters of privatization would reply that the system can't pay all promised benefits. If absolutely nothing is done to increase Social Security's revenue – a very remote possibility – then benefits will be cut by about 24 percent in 2053. But even then, the monthly benefit in the above example would be $1,625 – still 19 percent better than in the privatization scheme.

Interestingly, when the government takes back the money that it loaned you, it doesn't come out of the private account that it went into. Rather, it is deducted from the benefit that you receive from the traditional Social Security program. This will create the illusion that most of your benefits come from the private account – rather than from the traditional system. This indicates that the people who designed this privatization scheme want to undermine support for the traditional Social Security system – so as to get rid of Social Security as we know it altogether.

In the mean time, privatization won't make many dreams come true. The next time you hear someone telling you what a great deal it is, just tell them: show me the money.

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