A:  Any reputable financial advisor will tell you to read the “prospectus” first, and the “prospectus” for most Social Security privatization proposals will very likely change your mind.  It would be extremely difficult to achieve the rate of return you envision under the parameters of plans that have been proposed— including ideas from President Bush.  

For example:

• Most proposals place limits on what may be invested of $1,000 a year initially.  That’s far below what’s allowed under existing IRA and Roth rules.  A person ten years from retirement would be hard put to save enough to retire on.
• The government would reduce the future Social Security benefits of account holders not only by the amount invested, but also by a fairly substantial amount of theoretical gain— regardless of whether the accounts actually increase in value.  In a review of a major proposal favored by the president, the non-partisan Congressional Budget Office estimated that owners of private accounts may be left with nothing except significantly reduced Social Security benefits.
• The major proposals would limit the investments that could be made to a short list of diversified stock and bond funds, similar to the government’s, Thrift Savings Plan available to federal workers.  A number of prominent econmists have growing concerns this would give the federal government too much control over a number of private corporations.
• Under President Bush’s plan and other privatization proposals, the government would maintain control of your investment account.  This is not much different than the government maintaining control of our taxes in the Social Security Trust Fund.
• Despite the promise that “all the money in the account is yours, and the government can never take it away,” most proposals would require that workers to convert accounts to a government lifetime annunity at retirement.  Annuities do not allow the principal to be inherited.  If any money is left over after the annuities are purchased, that would belong to the account holder. 
• These annunities would be required to pay only  a minium benefit, based on your life expectancy, that would make up the difference between what you would receive in traditional Social Security benefits and the official poverty level.
• In order to pay for the accounts, most plans would overhaul the benefit formula, cutting Social Security benefits for all future retirees.  Major proposals also have provisions that TSCL believes will cut Cost-of-Living Adjustments (COLAs) for current retirees. 

Jonathan Weisman, a staff writer for The Washington Post, has estimated that if a worker set aside $1,000 a year for 40 years and earned 4 percent annually on investments, the accounts would grow to $99,800 in today’s dollars.  The government would keep $78,700 or about 80 percent of it.  The remainder, $21,100, would belong to the worker.

TSCL is opposed to plans that would privatize Social Security because money needed to pay current benefits would be diverted out out of the system and would thus worsen Social Security’s financing problems.  So far neither Congress nor the president has presented any balanced plan that would equitably cover the cost without deep cuts in benefits.

Sources: “Introducing Private Investments to the Safety Net,” David E. Rosenbaum and Robin Toner, The New York Times, February 3, 2005. “Participants Would Forfeit Part of Accounts’ Profits,” Jonathan Weisman, Washington Post, Thursday, February 3, 2005.