Here's an article from today's Post giving a different
analysis/perspective.

Renata

http://www.washingtonpost.com/wp-dyn...-2005Feb7.html
Bush Marketing Beats His Plan

By Allan Sloan

Tuesday, February 8, 2005; Page E01

You've got to give President Bush an A-plus for the way he marketed
the Social Security proposals in his State of the Union address last
week.

"If you've got children in their twenties, as some of us do, the idea
of Social Security collapsing before they retire does not seem like a
small matter," he said -- a sentiment with which even a skeptic like
me, who has twenty- and thirty-something kids, totally agrees.

You can't argue with Bush's stated goals of making Social Security
financially sound to allow Americans a secure retirement. But the
centerpiece of his proposals -- allowing workers the option to divert
up to 4 percent of payroll taxes into private accounts -- doesn't do
anything to fix Social Security's financial woes. Instead, it's a
fiendishly clever device that serves the political goal of remaking
the nation's most popular social program so that it's "a better deal"
for younger workers. There was a twinkle in Bush's eye when he said
that, a clever allusion to the New Deal of Franklin Delano Roosevelt,
father of Social Security. You could almost hear the Democrats
gnashing their teeth.

In their current incarnation, you'd almost certainly want to sign up
for these accounts if you were younger than 55. Yes, you'd have to
accept a smaller guaranteed benefit. But you'd come out ahead if your
account produced an annual return -- cash income and price gains -- of
more than 3 percent above inflation. That's not a slam-dunk, but it
ought to be attainable because you would have a choice among a handful
of high-grade, very-low-cost, very diversified mutual funds. But
there's a catch. You would own the account, sort of, but you wouldn't
control it. And you'd have to fork over the aforementioned 3 percent
return -- by taking a smaller benefit -- when you cash in your
account.

Bush, brilliantly, is marketing these accounts as empowering people
who'd have no other assets. But I don't think things would work out
well for these folks. There would be strict limitations on the
accounts -- you couldn't take money out of them before you retire or
even borrow against them. And the odds of low-income people being able
to leave a significant account to their heirs -- one of Bush's major
selling points -- strike me as remote.

Here's why. When it's retirement time, low-income people would
probably have to convert most or all of their private accounts into
annuities to have enough money to live on or to meet requirements that
their guaranteed benefits plus annuity income would exceed certain
levels. If you had to convert your entire account into an annuity,
there would be nothing left for your heirs when you died. Higher-paid
people, by definition, would have bigger private Social Security
accounts and less need for annuity income than lower-income people
would. This gives them a far greater chance of having something left
to hand down to their heirs and gives lower-paid people less chance.
Not to be snotty, but we higher-income types hardly need additional
breaks. We've already got plenty.

Staying power matters big-time, too -- and higher-income people have
more of it than lower-income people do. Although stocks tend to rise
over the long term, you'd have to cash in some or all of your
retirement account to buy an annuity when you retire. That puts you at
the mercy of events. Consider the following, produced at my request by
the Center on Budget and Policy Priorities. Say you retired in March
2000, with a private account that held $100,000 of stock in a Standard
& Poor's 500-stock index fund. (Index funds match the performance of a
benchmark; they don't try to beat the market.) Your inflation-adjusted
annuity would have been $7,558 a year -- about $630 a month -- by the
center's calculation. But if you had had the same number of shares in
your account and instead retired in October 2002, your account would
have had less than $60,000 in it. Your annuity: $3,352 a year, or $279
a month. The combination of lower values and lower interest rates is a
double whammy. You see the problem? You can get much less -- or much
more -- than someone who has saved at the same rate as you but retired
a little earlier or later.

If you've got financial staying power, you could wait for better days
or buy the smallest annuity the government will permit. If you don't
have staying power, you have to take what the market gives you.
Higher-paid people thus have a big advantage. The guaranteed Social
Security benefit, by contrast, is tilted toward lower-income people,
with a benefit of about 56 percent of Social Security-covered wages
for a minimum-wage earner, 30 percent for folks like me who have
reached the Social Security maximum every year. You're swapping
benefits skewed toward lower-income people for investment
opportunities skewed toward higher-income people.

I'm in favor of private accounts constructed along the lines that Bush
suggested. But the accounts ought to be in addition to the basic
benefit, not a replacement for about half of it. Democrats are crazy
to oppose private accounts. They really do empower you. The current
generation is used to investing and is understandably skeptical about
government promises. This isn't the 1930s, when only a handful of
people bought stocks and many of them came to regret it. It's the
aughts, guys, get with it. FDR's been dead for 60 years. The world has
changed.

If the president really wants to fix Social Security rather than pick
a political fight -- and the Democrats feel the same -- it wouldn't be
difficult. They'd compromise by putting more money into the system by
raising wage taxes a tad, taking less out by increasing the retirement
age and trimming benefit formulas and setting up private accounts
funded by wage earners, not by government borrowings. Put a few
willing negotiators in a room and a deal's done in a month. I won't
hold my breath, though.

Bush has marketed the pants off the Democrats by setting the terms of
debate. Do you want to pay higher taxes or lower taxes? Clearly,
lower. Do you want to pay estate tax or not? Do you want private
accounts, or don't you? He has done a fabulous job of showing the
goodies -- and of hiding the costs. People, naturally, have opted for
the goodies. The Bushies are in full sales mode, including sticking
recordings on Social Security's phone lines preaching that the system
has to change. In the name of empowering my kids, he's asking them to
pay full freight for my retirement and for trillions in new
borrowings, while forking over the same wage taxes for lower benefits.
If he can sell this one, the Marketing Hall of Fame should start
planning his induction ceremony.

Sloan is Newsweek's Wall Street editor. His e-mail address is
.

© 2005 The Washington Post Company

On 6 Feb 2005 02:54:03 -0800, "Lewis Lang" wrote:

Bush says that he wants to switch from the current Social Security
system to an individual retirement account (IRA?) system. He swears
that people over 50 will not be affected. What about the people under
50? Will they get screwed?