Social Security panel likely to offer 3 privatization options

By Brad Wright
CNN

WASHINGTON (CNN) -- Three private investment options are likely to be part of the President's Commission to Strengthen Social Security's final report, which is expected to be ready in about two weeks.

The commission was formed by President Bush with the mandate of easing an emerging Social Security crisis. Social Security, which funds retirement, disability and other benefits, is expected to begin running deficits in about 15 years -- largely because retiring baby boomers taking money out the system will outnumber younger people putting money into it.

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Worst-case scenarios are that it will be necessary to raise taxes or cut benefits or a combination of both to keep Social Security solvent. Determining how successful the commission is in avoiding such scenarios may depend on whether future benefit cuts are interpreted as being the same as "slowing growth" of future benefits.

Bush favors an approach allowing people to funnel a small percentage of the money they pay in Social Security taxes into a private investment account that they would manage. Armed with that mandate, as well as one not to raise taxes or cut benefits, the commission outlined three such private investment approaches it is considering:

-- A voluntary option to allot 2 percent of payroll taxes into a personal account to invest with no changes in benefits.

-- A voluntary option to allot 4 percent of payroll taxes, up to $1,000 a year, into a personal account. Under this plan, benefits would increase for "low-wage" earners so that by 2018, the worker who contributed for 30 years would be guaranteed a benefit equal to 120 percent of the poverty level. A surviving spouse's benefit would be 75 percent of a couple's benefits.

-- The option for making a separate contribution equal to 1 percent of payroll taxes into a personal account, with a 2.5 percent match from payroll taxes, up to $1,000 per year. Assuming that the investments in the personal account are greater than the 2 percent annual return that Social Security earns on its investments, people choosing this option would receive more in benefits. This plan maintains the survivor and low-wage-earner benefits of the second plan.

For people in the second option, "We're talking about as of 2009 beginning to hinge or index the growth of the initial benefit, the benefit that you start off with when you retire, to a price inflation index as opposed to a wage index," said Commission Co-chairman Richard Parsons of CNN's parent company, AOL-Time Warner. "So that means that as we go forward, under that particular option, the rate at which Social Security benefits would grow over time, once you initially retire, would slow."

Prices generally rise much more slowly than wages.

Parsons explained that for a low-wage-earner now making about $16,000 per year who retires in 2018, the benefit would amount to about $11,000 under the price-indexed system, compared with about $13,000 under the wage-indexed system.

Some Democrats in Congress are likely to oppose the plans the commission is considering.

"Abandoning wage-indexing for price-indexing," said Rep. Robert Matsui, D-California, "current and future retirees could be looking at a reduction of up to 48 percent in their benefits."

And, because people are living longer, recalculations in life expectancy formulas could also result in smaller monthly checks for future retirees.