One man's retirement math: Social Security wins

Who's right: Logue or Mr. Tanner?

The debate hinges considerably on what people want their retirement system to be. Social Security has always been an insurance program. It was never intended as an investment scheme. So everyone - retirees, the disabled, widows, and orphans - receive guaranteed monthly income. The "return" on their Social Security contributions depends largely on how long they live. Those in their 90s have enjoyed superb returns. Those who don't live as long benefit less.

Private accounts, by contrast, involve far more variability, both sides agree. Individuals who enter and exit the market at the right times would undoubtedly do better under privatization.

But under Britain's privatized pension system, so many retirees are doing so poorly at this moment that a commission warned this fall that widespread poverty among the elderly may be returning, which could require massive new government spending.

Presumably, President Bush's plan would offer the choice to meld insurance and private investment: much less guaranteed income in return for the opportunity - and risk - of earning more in the markets.

"Because financial asset returns are volatile, benefits under a personal account system would fluctuate," notes Bill Dudley, an economist at Goldman, Sachs & Co., a New York investment bank. "On a risk-adjusted basis, the privatized account ... becomes much less compelling."

There are other problems with private accounts. Administration expenses of the present Social Security system are minuscule compared with the size of the benefits provided. The Bush administration so far has provided no details on its private accounts plan. But if these are handled by Wall Street, the fees could be sizable, dissipating some of the return from investing in stocks. Logue takes no account of such expenses in his analysis.

Further, administrative costs and difficulties for private business could be large as companies, big and small, try to deduct the right amount from a payroll and put it into a private account in a timely fashion.

A study by the Congressional Research Service (CRS) notes some complexities: 650,000 employers go out of business or start new businesses each year. More than 4 million employers have 10 or fewer employees, often having record-keeping problems and errors. About 12 million to 15 million individuals are self-employed and presumably would have to send money directly to a private account.

So the complexities of change are substantial. If the extra return from privatization is not very advantageous, "why even consider changes that all agree would be very disruptive?" asks Logue.

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