Figuring (the lower total w P A) Social Security Benefit Under Bush's Plan

[papau]

http://www.nytimes.com/2005/02/06/politics/06social.html?oref=login

NEWS ANALYSIS
Figuring a Social Security Benefit Under Bush's Plan
By EDUARDO PORTER

Published: February 6, 2005


<snip>

To reflect the substantially lower contributions to the standard Social Security system, though, the standard benefit would be considerably lower than under current law. The basic benefit, said a White House official, who briefed reporters on the plan last Wednesday and requested anonymity because he did not want to upstage the president's speech, would be cut by the amount contributed to the personal account, plus a sum that reflected the gains from investing it at a rate of return of 3 percent above inflation.

The worker could still come out ahead under these terms. If the account were to earn an average 4.9 percent a year after inflation, minus 0.3 percent in fees - the figure often cited by White House officials based on estimates by the Social Security actuaries of the expected returns of a mixed portfolio of stocks and bonds - the worker's piggy bank would grow to more than $188,000 in today's dollars if he invested the maximum allowed, according to calculations by Dean Baker of the Center for Economic and Policy Research.

Taken as an annuity payment that would last the rest of his life, that money would generate $11,270 a year, or $940 a month, Mr. Baker found. Even after the offset carved out of the standard Social Security check, this worker's retirement benefit would add up to $24,530 in today's dollars, or $2,044 a month. That would be substantially more than the $21,220 a year - or $1,771 a month - that Social Security currently promises a medium wage worker after a similar career ending in 2050.

But there are other possibilities. As investors discovered in 2000, stocks can fall in value and stay down for some time. If a poor equity market or ill-timed investments left the average return on this worker's personal account at just 1 percent better than inflation, instead of 4.6 percent, the benefit would add up to only $18,650 a year, or $1,550 a month. <snip>

The White House is counting on keeping fees low. If the personal accounts paid a 1 percent annual fee, similar to what many workers in Britain have faced for the management of their private retirement accounts, a 3 percent real return would produce a nest egg that would yield an annual benefit of about $19,800, lower than today's promise. <snip>


Mr. Bush has not yet specified how he would restore the system to balance. Regardless of the method, the best that can be expected from private accounts is that they might cushion the blow of future cutbacks.