Overhaul Expected to Help and Hurt

Social Security, long considered an untouchable entitlement program, is about to get a long, hard look.

After his Nov. 2 reelection, President Bush vowed to overhaul the nation’s cornerstone retirement system to ensure that it is solvent for future generations of retirees. A key component is expected to be the creation of personal savings accounts.

These accounts, expected to be optional, would give workers the ability to direct some portion of their Social Security taxes into a separate stash that could be invested as they liked and even bequeathed to heirs.

By choosing a personal account, workers would give up some of their rights to future Social Security benefits. For example, workers who put 15% of their Social Security taxes -- or about 2% of pay -- in their personal accounts would see their future Social Security benefits reduced by that percentage.

In effect, the proposal would change the current system from a pure defined-benefit plan, paying a set monthly stipend for life, to a hybrid plan that combines monthly benefits with a separate savings account that could be tapped at will.

The proposal is bound to be controversial, because it would mean a fundamental change in how the Social Security system operates, noted Dallas Salisbury, president of the Employee Benefit Research Institute, an employer-sponsored group.

Social Security, conceived in the Depression era as a safety net for retirees, provides a disproportionate share of benefits to lower-income workers.

A worker who made $612 a month at retirement, for example, would currently get a monthly check for $551 from Social Security, or about 90% of pre-retirement salary.

But someone who makes $8,000 a month at retirement would get a check for about $2,000 -- about a quarter of pre-retirement earnings.

The disparity is there to help level the retirement playing field. Essentially, higher-paid workers subsidize the system to ensure that their lower-paid counterparts have enough money to live on.

There are other features of Social Security that allow people to collect benefits beyond what they have actually paid in.

Stay-at-home spouses, for example, can claim an amount equal to 50% of their working spouses’ benefits at retirement, even if they never worked or contributed to the system.

Divorced individuals who were wed at least 10 years can claim the equivalent of 50% of their ex-spouse’s monthly retirement benefit -- even if that ex-spouse went on to remarry, again and again.

That means that four nonworking ex-spouses of a single wage earner would each get 50% of the worker’s Social Security benefits, with no diminution of benefits to any of them or the wage earner.

The logic, of course, is that nonworking spouses also add value to a household, given that in many cases the wage earner would not be able to work effectively without the partnership of an unemployed spouse at home.

But in practical terms, it means that many more people are collecting checks than are actually paying into the Social Security system. The families of those who die young, the permanently disabled and people who live very long lives also tend to reap more than they sow (or was sown on their behalf).

Conversely, high-wage earners, two-income couples and singles who die young without dependents end up leaving a lot of their Social Security contributions on the table.

It’s the high-wage earners and middle-class, two-income couples who are likely to be most supportive of the Bush proposal, because it offers at least the potential that they can sock away and invest a portion of their Social Security savings that might otherwise go toward subsidizing the system.

For example, if the government decided to allow workers to “bank” 2% of their earnings, the person earning $612 a month would have only $12 a month to set aside. But the worker earning $8,000 a month would be able to save $160 a month, or almost $2,000 a year -- money that could be invested in stocks or other vehicles to generate income.

Divorced and stay-at-home spouses, on the other hand, would see their monthly payments diminished by whatever amount is diverted to personal accounts -- and their claim on these accounts would be finite. Salisbury of the Employee Benefit Research Institute said such a spouse would probably be limited to half of the other spouse’s account.

Salisbury said the institute’s studies estimated that 20% to 60% of the population could end up with less Social Security under a personal account system, depending on what assumptions are made about investment returns and life spans.

And, of course, the people most likely to be hurt are those for whom the Social Security safety net was originally intended.

“The Catch-22 is that the group who always comes out with less under a personal account scenario is the lowest- income segments of the population for whom the current program has always been the most important,” Salisbury said.

Kathy M. Kristof, author of “Investing 101” and “Taming the Tuition Tiger,” welcomes your comments and suggestions but regrets that she cannot respond individually to letters or phone calls. Write to Personal Finance, Business Section, Los Angeles Times, 202 W. 1st St., Los Angeles, CA 90012, or e-mail kathy.kristof @latimes.com. For past columns, visit latimes.com/kristof.

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Income after 65 Where Americans 65 and older get their income: Social Security: 39% Earnings: 25% Pensions: 19% Income from assets: 14% Other: 3%

Source: Social Security Administration