Show - ø The Salt THE WALL STREET JOURNAL d Pcrecnal Curacz3 like Tribune BUSINESS ' E5 Sunday:March 28 2004 Nal By Greg Ip How 'Fixing' Social Security Might Hit You 61 week the trustees who after Social Security that it faces a longterm unfunded liability of almost $4 trillion Uncle Sam's retirement is seriously underfunded plan and financially unsustainable in the long run" declared Treasury Secretary John Snow seizing the opportunity to press President Bush's solution of personal accounts Countless proposals have been advanced to fix Social Security But they rarely specify how people would be hit in the wallet—either in the benefits they could expect or the taxes they might pay Born In 1938 Social Security isn't even a issue in the 2004 presidential race Yet apart from Medicare which is even more underfunded there are few problems facing the millions of baby boomers now on the verge of retirement—and the Generation Xers and Yers who will pay for it Social Security's problem is simple: Workers and employers pay payroll taxes which then go to pay benefits for those already retired This worked fine when the number of workers far outweighed the retirees But over time people are living longer—which means there are more retirees collecting benefits—and having fewer children which means there are fewer workers contributing payroll tax Today there are 30 retirees for every 100 workers and Social Security will run a surplus this year of payroll tax over benefits But as boomers start to retire in 2008 the number of retirees will shoot up hitting 49 per 100 workers by 2040 and fast taming surpluses into large and growing deficits The federal government meanwhile has already spent the surpluses from past years so in as little as 15 years it will have to find some other way to finance benefits The only ways to stabilize Social Security are to reduce benefits raise taxes or both (Personal accounts by themselves won't do it) The impact on individuals will vary with age income life expectancy and the details of each proposal But in general cutting benee workfits is harder on ers while raising taxes is harder on the higher-paiThat's because benefits become less generous as Last The Probism gross domegic product 1011 05 00 -- 05 -- 20 'le Social L Tweaking inflation indexing of benefits Benefits are meant to rise each year with the cost of living But Federal Reserve Chairman Alan Greenspan maintains that the consumer price index overstates that cost by failing to adequately capture consumers' habit of buying less of what's pricier and more of what's cheaper He recommended instead that benefits be indexed to the Labor Department's new "chained" CPI which adjusts better for this Annual inflation has been 04 percentage point less since 2000 under the chained CPI Assuming the gap stays constant someone retiring at 65 would after 10 years be collecting 4 70 less a year than under regular CPI After 20 years he'd be getting 8 less By Mr Greenspan's logic the retiree's purchasing power isn't falling it just isn't being boosted by a flawed inflation index 2 Indexing to life expectancy A man who turned 65 in 1940 could expect to live to 77 Today he can expect to live to 81 and by 2035 it will be 83 Women's life expectancy is advancing even further The longer retirees live the more benefits they get This has triggered ideas by Mr Greenspan and 1111''111"111'1 I '10 '20 '23 '30 15 '40 '41 Secant lustros your wages rise but payroll tax stays the same: 124 of wages up to an $87900 maximum Someone earning about $16000 a year who retires in 2004 can expect an annual benefit of 18800 Earn five times as much and your expected benefit is less than three times as much: $21900 Here is a rundown of some proposals to fix Social Security and how they would hit home: d 1 15 2005 low-wag- I 10 -- Smite more-pressin- g 1 -- t t worker-employ- an ? n re- flect higher life expectancy One way to do this is to raise the normal retirement age already scheduled to rise to 67 in 2027 from 65 now lb someone who at age 65 expects to live 16 more years waiting an extra year to collect benefits lops 67 off total retirement benefits For those with shorter life expectancies such as African Americans and the poor that percentage is greater Another idea is to shave benefits for those retiring at the normal age in proportion to rising longevity That's part of a proposal by Jim congressman Republican Kolbe and Democrat Charles Stenholm which by itself would cut the benefit of someone born in 1958 by 37 and the benefit of someone born in 2008 by 16 3 Slowing buildup of benefits Once you retire benefits are indexed to inflation But while you're working the benefits you eventually can expect are indexed to the average wage which grows about 1 to 15 faster than inflation One way to curb Social Security's cost is to let future benefits grow only as fast as inflation not as fast as the average wage That Idea is central to a second model proposed by President Bush's commission on Social Security This would have a major impact As each year passes people entering retirement would find themselves further behind the average standard of living (although benefits wouldn't be allowed to fall to poverty levels) For someone born in 1957 benefits would be 9 lower than what they would otherwise be For someone born in 2002 benefits would be 41 lower according to Peter Orszag of the Brookings Institution and Peter Diamond an economist at the Massachusetts Institute of Technology 4 Raising payroll taxes There are various ways to do this Raising the current combined tax of 124 to 14370 would keep the system balanced for the next 75 years Another way is to lift the maximum wage subject to Social Security tax That cutoff now $87900 rises over time with the average wage But because wealthier Americans' incomes have grown much faster than average the portion of all in Though the Social Security system now mns a modest surplus by 2045 its projected deficit will approach 2 of front-burn- f others that benefits somehow pr) l f - 0 Your etteat 7 mows 1- IMPACT PROPOSAL Redirect 4 percentage points of payroll tax to personal account with 50 in stocks Regular benefits shrink but personal account more than makes up for this reduction as long as it returns more than 2 a year beyond inflation (President's commission Plan 2) Use a benefits for inflation someone born current plan 111 increase contribution and benefit base from the current $87900 benefits III A An 143 from 124 II Increase taxes extra 2 cents deducted from every dollar of income up to $87900 of income on benefits received by retirees El Most retirees would pay more tax worRers would be unaffected Invest some or all of Social Security trust fund Sources: Social Security stocks in No direct impact except to the extent that to raise taxes or cut benefits 111 actuary President's commission on Social Security Peter Orszag and Peter Diamond: time are expected to return 65 percentage points a year beyond inflation while corporate bonds return 35 percentage points more and government bonds 3 points more By comparison a 2001 study by Social Security found the typical worker earned Just 27 on each dollar paid into Social Security while the highest-paiearned a paltry 025 (Lower-paipeople and couples did much better) Most plans would curb regular benefits in proportion to how much a worker diverted to a personal account but not by enough to hurt the option's overall allure Under the Bush commission's second proposal workers starting in 2009 could divert up to 4 percentage points of Social Security tax up to 61000 to a personal account Regular benefits would be cut but as long as the personal account returned more than 2 a year after come not subject to Social Security tax has grown from 10 in 1983 to 15 now Mr Orszag figures raising the maximum to about $130000 would lift the Social Security tax base back to where it was in 1983 That would cost a worker 85200 more in Social Security tax assuming workers ultimately pay both their own and the employer's share of the 124 Their benefits would rise but not enough to offset the higher tax 5 Creating personal accounts President Bush and many others would like workers to divert some Social Security tax to personal accounts that invest In stocks and bonds much like a 401(k) This wouldn't help Social Security's solvency unless coupled with changes to benefits and taxes and could worsen problems in the near term Still workers may find the accounts very attractive Stocks over high-incom- e single- -earner Wall it reduces pressure Street Journal research Inflation it would outweigh the loss of regular benefits Assuming 50 of the personal account went to stocks Social Security actuaries estimate that the monthly benefit of someone now earning $35000 who retires in 2032 would rise 0770 from 51313 to SI353 For today's S85000 earner the benefit would rise 03 from $2151 to $2157 If this worker retired in 2052 the rises would be 167( and 06 Under other plans up to $2000 could divert to personal accounts One plus for personal accounts: It would be harder for the government to take them away What do you think should be done to fix Social Security? Write: torumsunday030wslcom and include your name address daytime phone number and the paper where you read Sunday Journal And for this one please tell us your age Nv ADVAAVTA 5 YEAR '7 :-- i - 1 I A V Adgaz II Si' iolitlz - '':- - 17' Simple 'Menet Rate k () 0 6 53°A) 559 1 1131t9 46400 3 YEAR Community Military Ileith‘ Minimum investment $5000 milestones Religious Terms from 12 months to 5 years promotions awards honors i Interest compounded daily can be paid monthly quarterly semiannually annually or at maturity 3 Annual Percentage Yields (APYs) are subject to change weekly The APYs shown above are available through April 3 2004 This announcement Is made only by the Grocery Guru and save up Peed wverrietity yoa '10) le iU Book fA3 VISIT OUR LOCAL OFFICE: (consite parking wdi be valtdated) Cl(V I your ideal honeymoon find local merdionts and services and more - Email announcements and more 96t eacats dosoretnewscom neither an offer to sell nor a solicitation of an offer to buy Notes The offer Prospectus to residents of CA CO CT DE FL CA KS MA MD MN Ni NY is OR PA UT The Notes are being sold by Advanta Corp and the proceeds will be used for general corporate purposes The Notes represent obligations of AdN anta Corp and are not insured or guaranteed by the FDIC or any other governmental or private entity Create your own personalized wedding Web site FREE to 70 percent on your grocery bill! Ii rise by somewhat less Raise payroll taxes for employeremployee combined to ra Retirement awards online t 124 Depending on which taxes go up all workers and retirees could pay more tax young workers would pay most over time Birthdays announcements Peruse current and past special sections — Those earning less than $87900 unaffected an extra cents in tax deducted from every dollar of income over Raise general taxes to cover shortfall ili!A"-4- Create a saved 'wish list" 16- III $87900 4 YEAR achievements item you need is advertised liblOdEbalow Benefits for person born in 1958 would be 37 lower for in 1988 they would be 117 lower than in Index benefits to longevity increases after 2008 your announcement notification when on m"4-- w $85000 earner ° Using 'chained CPI benefits would be 4 lower than after 10 years 8 lower after 20 years scheduled previously ----- allowing you see photos etc in ) tClez! L9t'l -- higher for For someone born in 1957 benefits would be 9 lower for someone born in 2002 benefits would be 41 lower Dudng working years allow benefit credits to grow with inflation instead of average wage AIT D Retail ads appear just as they do in print CAc1Y II consumer price index to adjust higher than before for $16000-a-rahigher for $35000 earner and one-sto- p honors Check out 03 13 196707 - Browse full classified listings n Benefits could be earner born in and photos today Search for ads by keyword Sign up for - It's Bound to Do Painful for Somo of Us calde (roJi celetvition? 'Yncittle goLtdi and de Wiwi ncad quickfil CLflL eratiy In (" I 1invk'tit4:file'etzi'nii Uhlat'd you1 racezomcco :o i Here are some plans to keep Social Security afloat and the likely impact on taxpayers and retirees: online resource! (Vribi - - - L? I kL::: allclo 1 A t 1 i'N 111" 141- : tr ---- C1PJ361w?5 ttli'DoLo COGI7 ""11istHI ' SECIARil SOCIAL I 4'1444) 144:tt41 Parksido Tower 215 South State Street 1st Floor i 84111 Salt take City UT vile I Annual Percentage s paid only at maturity Yield assumes interest Advanta Corp a Publicly Owned Company is traded on NASDAQ (Symbols ADVNA & ADVNB) mmadvantacomtnotes Providing Financial Services Since 1951 Source Code: GPARSXBTXX - sitribcom TtAtiA01014 11: ?04 Morning to) 41110 1 NiAnahMIN4001POMMAMMaMiME0MiIIERIEliniiiiiidlIMPEWWilliadlib611MIONEMakMNNMAMI 1 I COYI 4000texoso |