FIXING SOCIAL SECURITY

February 2005
		President Bush has launched a national campaign to generate support for his plans to reshape Social Security, including the controversial option of personal investment accounts for younger workers. Peter Orszag, senior fellow in economic studies at the Brookings Institution, and Michael Tanner, director of health and welfare studies at the Cato Institute, answer your questions about the voluntary personal accounts and other aspects of the president's plan. Special Report: Social Security Reform

Forum Introduction What are President Bush's plans for Social Security disability? Didn't Great Britain undertake the personal accounts experiment with their version of Social Security to detrimental results? How do the personal accounts affect employers' contributions to Social Security? How would removing the $90,000 income limit on Social Security taxes affect the system's future? What happens if a person's private account runs out? How will the average person who knows nothing about investing fare under President Bush's new plan? How does the federal Thrift Savings Plan differ from Social Security? Under the personal accounts proposal, will there be fees for investing, and who and how will they be paid? If the IOUs in the Social Security trust fund were paid, would the system remain solvent for a much longer time? Why would anyone want to change Social Security, an insurance program, into a savings account? I'm 48, how drastic are my benefit cuts going to be?	James Przewoznik of Chicago, Ill., asks: Did not Great Britain undertake this experiment with their version of Social Security? Wasn't the result, after the stock market collapsed, a generation of the poorest seniors in any Western economy? Peter Orszag responds: Yes -- the parallels are remarkable, and the bottom line is that the individual accounts in the UK have not worked well. In what has been called the "misselling" scandal, the financial industry mislead many workers into opting for individual accounts when those accounts were inappropriate; the industry has been forced to compensate these workers for their losses. And before the government stepped in to regulate fees, the administrative costs on the accounts were exceptionally high (for a discussion of the pre-regulation fee levels, see http://www.cbpp.org/3-16-99socsec-pr.htm). In 2001, I testified before Congress on the lessons from the UK experience. See http://www.brookings.edu/views/testimony/orzag/20010731.htm. Another very good recent article ("A Bloody Mess") on the UK experience was recently published in the American Prospect: http://www.prospect.org/web/page.ww?section=root&name=ViewWeb&articleId=8997. Michael Tanner responds: Actually, British seniors receive higher benefits than they did prior to the reforms. The old, government-run pension system provided benefits so low that, if you relied on it, you had to go on welfare. That said, the British system of individual accounts was poorly designed, overly complicated, and vulnerable to fraud. Much of this is die to peculiarities of existing British pension law, but it provides a cautionary example. How a plan is designed is important. The proposal being suggested by President Bush would avoid the pitfalls of the British example.

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