Poorest Face Most Risk on Social Security

A Call To Action

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Bush Plan's Success May Hinge on Perceived Safety

By Jim VandeHei
Washington Post Staff Writer
Saturday, February 19, 2005; Page A01

No group of Americans would be affected more by President Bush's Social Security plan than those earning the least. Just ask 46-year-old Brent Allen.

Allen, who recently lost his job at a Massachusetts paper mill, faces a retirement financed exclusively by the money he has been paying into the Social Security system for the better part of 30 years. Like nearly half the U.S. population, he has no pension or savings to speak of. And his brief flirtations with the stock market have largely flopped.

So Allen, who lives on less than $15,000 a year in disability payments from Social Security and income from his live-in girlfriend, is distrustful of Bush's plan to allow workers to divert a portion of their payroll taxes into personal investment accounts.

"I have had stocks, and have had them for six years, and I have lost money continually," Allen said this week. "What's going to happen to people when they retire when the market is down? There is no guarantee [Bush] can make. There is a guarantee now," under the current system.

More than 60 million Americans 25 to 64 years old reported incomes of less than $25,000 in 2002, the latest year for which government figures are available. Like Allen, most of these workers have small or no pensions, scant savings, and serious concerns about their retirement years, according to government statistics and polling results.

Bush sees personal accounts as the gateway to their financial security -- giving them a chance to join tens of millions of Americans with significant investments in stocks and bonds for their retirement. But unless he can convince Democrats and skeptical Republicans that the personal accounts would be a wise and relatively safe investment option for low-income workers, his proposal is likely to fail, many lawmakers agree.

Bush is lobbying Congress to allow Americans younger than 55 to eventually put 4 percent of their income subject to Social Security taxes into personal retirement accounts, in exchange for a reduction in guaranteed benefits, if they choose. Those who opt to divert a part of their payroll tax would invest the money in a small menu of stock and bond funds that they could not touch until they retire. Unlike in the current retirement system, they could pass on the money accumulated in the personal account to family or friends when they die.

The president says Americans would end up with a stronger Social Security system and bigger nest eggs under his proposal, although the White House has yet to release full details of the plan.

"We can build a better system for low-income workers based on the power of investment and the magic of compound interest," said White House spokesman Trent Duffy.

Critics, including most Democrats, say individual investment accounts are too risky, they would impose restrictions on the way lower-income retirees could spend the proceeds from their accounts, and they would require unwise and costly reductions in the guaranteed benefits offered by the current system.

Because Social Security is often the biggest or the only source of retirement money for the poorest Americans, low-income workers would be hit particularly hard if the markets plunged and they were left with smaller benefits than they would have received under the current system.

Under the Bush plan, low-income workers would be required to purchase an annuity, which pays a fixed stream of money until the person dies, or set up an alternative way that keeps them above the poverty level until death using their personal account funds. The administration said such mandates are needed to keep seniors from falling into poverty by emptying out their accounts upon retirement.

Fay Lomax Cook, director of the Institute for Policy Research at Northwestern University, called the accounts "much too risky."

"The whole purpose of Social Security has always been to ensure basic income to those no longer able to work. That basic income can no longer be guaranteed" under the Bush plan, she said.

Responding to suggestions from Federal Reserve Chairman Alan Greenspan and a small group of Senate Democrats, Sen. Lindsey O. Graham (R-S.C.) said in an interview that he will lead an effort to pressure Bush to provide more generous benefits to the working poor to win passage of the president's top domestic priority. "I am trying for a plan that will meet with legitimate concerns. People worry [the accounts] will put low-income workers at risk because they cannot afford to lose money," he said.

Graham said he will soon propose a federal guarantee that those who earn less than $30,000 will do better under a partially privatized Social Security system. He would do this by cutting scheduled benefits only for those making more than $30,000 a year, offering a $500 government contribution to the individual accounts of the low-income workers and providing additional protections against precipitous market drops. "I am trying to get a bipartisan beachhead and have the administration react to it," Graham said. Bush is open to the ideas, Duffy said.

David C. John of the Heritage Foundation, which supports the Bush plan, said the president will eventually have to embrace significant protections and incentives for low-income workers, perhaps allowing them to put a much higher percentage of their income in personal accounts than everyone else, to win support of Democrats.

Social Security provides more than half of retirement benefits to nearly two-thirds of the nation's elderly, according to the latest Social Security Administration data. It is the only source of income for 20 percent of retirees. For those struggling to get by, Social Security is often their only safeguard.

As a result, many experts think the debate over the Bush Social Security plan will come down to one question: Is it a good deal for the neediest people? The system was created 70 years ago during the Depression by President Franklin D. Roosevelt to provide a safety net for those who could no longer work. Critics contend that Bush cannot create individual accounts without cutting the benefits promised under today's program.

Bush argues that personal accounts are the only way to guarantee all workers -- but especially those with low incomes -- generous Social Security benefits in the future. The reason, he says, is there is no way the government can fulfill its current promises without raising taxes or borrowing trillions of dollars because, starting in 2018, Americans will be taking more money out of the system in the form of benefits than they are contributing through payroll taxes. Bush envisions the personal accounts generating enough profit from investments in stocks and bonds to offset future reductions in guaranteed benefits.

In guidelines he presented to lawmakers, Bush proposed structuring the program to allow the working poor to benefit the most in the early years of the system. Starting in 2009, only those making $25,000 or less could contribute the full 4 percent of their income subject to the Social Security tax. Annual contribution limits will be set at $1,000 and rise $100 each year thereafter. It will take richer Americans as long as 32 years before they can contribute the full 4 percent of their salary, said a senior White House official who spoke on the condition of anonymity.

To limit risk, the White House supports only a small menu of relatively conservative investment options. "The narrow menu would certainly help," said Lomax Cook, a critic of the plan. "But what if some stocks and bonds don't do well? The federal government cannot guarantee performance of stocks." The senior White House official said history shows stocks and bonds are wise long-term investments. Moreover, he said, "no one is exposed to risk that does not want any risk" because the program is voluntary.

Bush has not ruled out additional protections, including a minimum guaranteed benefit regardless of how a person's investments perform.

© 2005 The Washington Post Company