Politics: Social Security, Private Accounts Actually Private Loans

Prior to last night’s State of the Union Address, an administration official briefed journalists on the details of Pres. Bush’s Social Security privatization plan. Turns out these “personal accounts” are actually personal loans. That’s right in exchange for guaranteed benefit cuts, you’ll get the privilege of borrowing money from the government at a 3 percent interest rate. You’re forced to invest this money in a limited choice of government-approved plans. The real kicker is that you only get money back at retirement if your investments returned better than 3 percent. Jonathan Weisman, Washington Post Staff Writer, explains it this way:

If a worker sets aside $1,000 a year for 40 years, and earns 4 percent annually on investments, the account would grow to $99,800 in today's dollars, but the government would keep $78,700 -- or about 80 percent of the account. The remainder, $21,100, would be the worker's.

If the account returns at the same rate as money under the traditional system, the worker gets no added benefit. The Administration has not said what would happen if the account performs more poorly than 3 percent. The Administration also neglected to mention how they are going to pay for transition costs and how this would affect survivor and disability benefits.

Read and think of this article and ask yourself, “Why won’t my President tell me the plain-spoken truth?”

(update, 2/4/05, 12:06am) Amongst vehement urging by the Whitehouse, the Washington Post has made corrections to the article I linked to above. The Whitehouse objected to the original wording because it made it seem like the government was going to "claw back" the principle plus interest of the private accounts. The new article removes this ambiguity and also fleshes out proposed guaranteed benefit cuts that weren’t described in the original article. Basically the cut in the guaranteed SS benefit will match dollar for dollar the amount diverted into ones private account plus the interest that money would have accrued in the SS Trust Fund. In return, the private account is used to purchase an annuity at retirement. The annuity is used to supplement the reduced SS benefit. Check out the projections in the post above to see how the math still works out.