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?	Jane Ames of Charlotte, N.C., asks: If the president's plan for personal accounts is adopted, will there be fees for investing, and who and how will they be paid? Will individuals be responsible for managing their accounts to insure maximum benefits, and is it realistic to think that everyone will be able to do so? Michael Tanner responds: The Social Security Administration has estimated that fees for managing the accounts would be very low, about 3/10 of a percent of the assets managed. Individuals would not be actively managing their accounts but simply choosing from a small number of broadly diversified investment options, similar to the federal Thrift Savings Program used by government workers. There would be a default option of a "life-cycle fund," a fund whose composition automatically changes as you age, moving from mostly stocks when you are young to mostly bonds shortly before you retire. Peter Orszag responds: Yes, there will be fees. The administration assumes that they will amount to 0.3 percent per year (so if your investments had yielded 3 percent, the net return after administrative costs would be 2.7 percent). That is likely to be a reasonable estimate for a system in which investment choices are very constrained and the level of customer service is relatively low. But it's not clear that these restrictions will be sustained -- workers may want to invest in specific stocks rather than just index funds, for example, or hold their accounts at their financial firm, rather than with a centralized entity. If the restrictions were loosened, the administrative costs could skyrocket -- as the experience in the UK demonstrates (see question 2).