Social Security in flux: change is inevitable. With more control over your benefits, you may even come out ahead

Kiplinger's Personal Finance Magazine, Sept, 1998 by Mary Beth Franklin

Change is inevitable. With more control over your benefits, you may even come out ahead.

Anticipating The Demise Of The Social Security system is like waiting for "the big one" to strike the San Andreas Fault--lots of people believe it's inevitable, but few are willing to change their lifestyle today to prepare for what might happen tomorrow.

We're not in the earthquake business, but we have no qualms about predicting that social security will not succumb to the onslaught of 77 million baby-boomers, who will begin retiring around 2010. Sure, changes must be made to the nation's retirement system. That's been clear for years. And now the outline of likely alterations is coming into sharper focus.

With several proposals on the table, there's growing pressure on Congress to grapple with the problem next year-during the one-year window between midterm congressional elections and the 2000 presidential race. In addition to the traditional "solutions"--higher taxes, lower benefits, later retirement ages and squeezes on cost-of-living adjustments--the debate is likely to focus on "privatizing" the system--that is, allowing at least part of the taxes you pay to go into an account that you control.

That's the cornerstone of the latest proposal, one put together by the National Commission on Retirement Policy (NCRP), a panel of scholars, businesspeople and politicians. Guaranteed benefits would be reduced, but you could make up the shortfall by diverting a portion of your social security tax to a personal savings account.

Currently, the social security tax claims 6.2% of your first $68,400 in earnings--a maximum of $4,240 this year. (Your employer pays the same amount on your behalf.) For workers age 55 and younger, the NCRP plan would divert part of that tax (2% of your income) to a government-administered personal savings account. (Older workers would not have such accounts and would face only minor changes under this proposal.) Much like the current Thrift Savings Plan for federal employees, you would choose from several investment options.

The idea is that when you retired, you would convert your personal account into an annuity, which would provide monthly payments for life. Depending on how well your investments did, those payments could offset--or maybe more than offset--the cut in traditional social security benefits.

Diverting 2% of payroll to these private savings accounts would cost the government billions of dollars, money it now pays out to current retirees and pays into the social security trust fund, which is a bulwark against the coming demands of the baby boom.

How would the government bridge that gap? Sponsors of the NCRP plan envision using the current budget surplus to fund the transition from a completely pay-as-you-go system to one that pays some future benefits through private accounts. Giving workers control over their own accounts has another goal, too: It's supposed to instill confidence in young workers that the system will be there for them when they retire.

Whether such a plan is feasible is a matter of heated debate. Francis Cavanaugh, former head of the Federal Retirement Thrift Investment Board, says it would be impossible to establish cost-effective personal savings accounts for 140 million employees, particularly for low-wage workers, whose meager earnings in private accounts would hardly pay administrative costs.

"If modeled after the 2.3-million member federal Thrift Savings Plan, it would require at least 10,000 highly trained federal employees to man the telephones and answer employee questions," Cavanaugh told the House Ways and Means subcommittee on social security, which is investigating various reform proposals.

That's just one reason it's far from certain how social security reform will play out. So, as Congress gets down to business, you need to keep a careful eye on how your future could be affected. One of the following portraits may come close to the picture the NCRP plan would paint for you.

Generation X

THE DISBELIEVERS

Matt and Laurie Paz of Long Beach, Cal., are newly married, in their late twenties and don't expect to receive a dime in social security benefits. That's one reason why, despite a combined income of more than $80,000, Matt says they live more humbly than their friends who have comparable incomes. The couple is pouring $400 a month into savings to build up an emergency fund and eventually to provide a down payment on a house, and they are putting another $250 a month into retirement investments.

Their skepticism about social security is widespread among those who will follow the boomers into the sunset. And the Pazes would feel the brunt of the NCRP proposal to raise the retirement age to 70 for those born after 1959. But they hope their aggressive saving and investing will let them decide when they want to retire.

"Our goal is to live comfortably and not have to worry in retirement," says Laurie, a staffing consultant for an accounting firm. "To do that, we have to save as much as we can now." Matt, a lieutenant in the U.S. Coast Guard, says he supports the idea of workers deciding how to invest a portion of their social security tax and wishes they could decide what to do with all of it.