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What you need to know about personal savings accounts

"The Social Security system is incredibly frugal in terms of its administration dollar," he says, adding that the average mutual fund fee is over 1-percent annually. "Estimates are that these private accounts would be at least that much. Most people are going to have very small accounts. Those accounts could get eaten up by fees."

"There's also some question about dependents and women who don't work outside the home," says Morris. "There is an option to put 50 percent in a spouse's name, but not an obligation. And it's women who have benefited the most from Social Security. I have no sense here that that is guaranteed or whether they would be covered in the traditional plan."

One plus: "If you die before you begin to collect, your money goes into your estate tax-free," says Morris. "Also the pay-outs are tax-free. What's happening is that people who already have the most stand to benefit the most."

Any guarantees?
The guarantee of a baseline or minimum payment is uncertain at this point, says Hickey.

"Some proposals out there would cut your guaranteed benefit," he says. In others, "if you invested in stocks, and your rate of return is not as good as you would have gotten under Social Security, the government would be required to make up the difference. Frankly, in the event of a dramatic stock downturn, we would be a clamoring for that kind of government bailout in any case."

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Others see less of a risk for investors. "The vast majority of contributions will be in low-return, fixed-rate vehicles," says Tyson.

But some worry that promises of minimums aren't realistic. "How are they going to do that," says Morris. "If they can guarantee that, then why can't they guarantee the current system?"

For that matter, she says, why don't they cut out the investor-middleman and put the current withholdings into the same type of vehicles?

Where's the money and who's watching it?
Investors and finance experts will likely need more information on who will be managing the money, as well as how those companies will be selected.

Ideas now being floated: the government selects one brokerage company, the government selects several brokerage companies or the government creates an entity that does all or part of the management itself.

Farrell, who spent five years at Morgan Stanley, would like to see brokerage houses competing for each consumer's business. The choice he wouldn't want: the system currently in place for federal employees, who only get to choose between a handful of funds, he says.

Another big debate: if you are truly free to invest the money as you see fit, should you be allowed to invest in anything you choose or should the government limit your investment choices?

Does that monthly check really matter?
In a perfect world, no one would be totally dependent on a Social Security check. But for one fifth of retirees, Social Security is half or more of their income, says Neal E. Cutler, professor of financial gerontology at Widener University in Chester, Pa.

"It's a major source of income for most of the elderly in the U.S.," says Stephan Leimberg, CEO of Leimberg Information Services Inc., which supplies information on legislation, cases and rulings for tax professionals. "So what happens if the majority of them mess up their investments? It's almost impossible not to make a mistake in investments sooner or later."

If the system is coming off autopilot, are there provisions for teaching individuals the finer points of steering their investment money? "Most people are not good investors," says Leimberg. "And it's even hard for good investors."

Cutler has done his own studies and worries that the general public doesn't have the working knowledge to grow money.

Making smart money decisions "takes a lot of knowledge," he says. And the people who need Social Security the most are "the people whose lifetime background least prepares them to make those kind of financial decisions."

Likewise, what happens to people who are now halfway through their working-and-saving life but started out contributing to the old system before switching over?

For people who are now in their 30s and 40s, if there is a guaranteed return, and "if there is an escape mechanism that says you can opt out any time you want, then they might be OK," says Morris. "But I think it's being sold as a 'for sure good thing' when many of the potential problems have not been acknowledged or worked out."

One thing Tyson would like to see: "As people get closer to retirement age, and to drawing out their money, there should be a mechanism for lowering their risk."

Farrell doesn't doubt some measure of privatization will pass. But there are "going to be a huge number of questions here," he says. "And I don't think it's going to happen very quickly. I can't imagine Congress coming up with a plan that would satisfy all the forces out there."

Dana Dratch is a freelance writer based in Atlanta.

-- Posted: Dec. 22, 2004
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See Also
The complete dope's guide to Social Security reform
Savings glossary
More savings stories

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