President Bush's Social Security Reform PlanI did a little digging around and found some of the facts concerning our current system. In 1935, the average American did not live long enough to collect retirement benefits from the Social Security System. This tells us that the system was originally designed so that the majority of Americans would not receive any benefits. Social Security is a pay-as-you-go system, in other words, taxes on today's workers pay the benefits for today's retirees. There is not an account out there that has your name on it. You do not have a Social Security savings account waiting for you the day you retire. When Social Security was first created, there were 40 workers for every one retiree, and most workers did not live long enough to collect retirement benefits from the system. In 1950, there were 16 workers for every one receiving Social Security. Today, there are only 3.3 workers for every Social Security beneficiary. By the time our youngest workers turn 65, there will be only 2 workers for each beneficiary. By 2031, it is estimated that there will be almost twice as many older Americans as there are today - from 37 million today to 71 million Americans in 2031. If the current Social Security system stays as it is now, the only solution will be drastically higher taxes, massive new borrowing, or sudden and severe cuts in Social Security benefits or other government programs. President Bush’s Social Security reform plan is an attempt to re-vamp our current system that includes the following: If you were born before 1950 the Social Security system will stay as it currently exists and you will receive benefits as though nothing has changed. President Bush’s Social Security reform would set up retirement accounts similar to a 401-k plan for those that opt into the new plan. Annual contributions to personal retirement accounts initially would be capped, at $1,000 per year in 2009. The cap would rise gradually over time, growing $100 per year, plus growth in average wages. Yearly contribution limits would be raised over time, eventually permitting all workers to set aside 4 percent of their payroll taxes in their accounts. Unlike the current Social Security system these personal accounts would be in your name for your use when you retire. The government would not be able to touch your account for any of their needs. You would have sole ownership of your account. Any money left in your account would be passed on to your loved ones at death. Workers will have the option of either staying in the current system or contributing into a new personal account. You would not be locked into your one choice, but you will also not be able to jump back and forth between the two systems. Personal retirement account options and management would be similar to that of the Federal employee retirement program, known as the Thrift Savings Plan (TSP). A centralized administrative structure would be created to collect personal retirement account contributions, manage investments, maintain records, and facilitate withdrawals at retirement. The structure would be designed to facilitate low costs, ease of use for new investors, and timely crediting of contributions. This centralized investment structure would help minimize costs for employers. I have some personal experience with the Thrift Savings Plan and it has proven to be a good retirement investment system. Over the years since its inception it has improved. Currently you can access your account at any time on the Internet and see exactly how your account is performing. Personal retirement accounts would be low-cost. The Social Security Administration's actuaries project that the yearly administrative costs for a TSP-style personal account would be roughly 0.3 percent, compared to an average of 1.25 percent for investments in stock mutual funds, and 0.88 percent in bond mutual funds in 2003. An expense of 0.3 percent is very low for the mutual fund industry. American workers who choose personal retirement accounts would not be allowed to make withdrawals from, take loans from, or borrow against their accounts prior to retirement. It would be set up to keep us from ruining our retirement future on an impulse decision. We all know that a little money in our pocket can be tempting, but we will not be able to take from our accounts at will. To ease the transition to a personal retirement account system, participation would be phased in according to the age of the worker. In the first year of implementation, workers that were born 1950 through 1965 inclusive would have the option of establishing personal retirement accounts. In the second year, workers who were born 1950 through 1978 inclusive would be given the option and by the end of the third year, all workers born in 1950 or later who want to participate in personal retirement accounts would be able to do so. This phase in is one of the things that I do not like about the personal accounts as proposed. I believe that we should be allowed to get in right away, but the government is a slow moving object and often feels that changes are easier if phased in. At my age (early 40’s) I would need to get in and start investing soon to be able to reap the benefits. With President Bush's Social Security reform plan as proposed, participants would have a choice of five investment funds. These funds are the same as those included in the Thrift Savings Plan for government employees. These investments currently include:A stable value fund invested in U.S. Treasury Securities.An index fund comprised of investment grade bonds. A small and mid-cap stock index fund. A large cap stock index fund. An international stock index fund. These funds have the following 10-year compound annual rates of return: Government Securities Fund 6.04%Bond Index Fund 6.95%Common Stock Index Fund 10.99%Small Capitalization Stock Index Fund 9.70%International Stock Index Fund 4.32% If you have read the information on this site you surely realize that I believe in self-sufficiency. This is exactly what President Bush’s Social Security reform would lead us towards. We would be responsible for, and own, our retirement future without depending on the government to take money from other workers to provide for our retirement income. The starting amount of $1,000 per year invested at an 8% return over a 30-year working career would grow to $113,283. It is easy to see how increasing contribution limits over the years would allow this to grow to a substantial amount of money at retirement.
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