In his State of the Union address last month, President Bush outlined some details of the private accounts he is proposing for the Social Security program, but failed to mention a critical fact about those accounts–individuals who chose to have a private account also would get a large, automatic reduction in their Social Security benefit at retirement. A senior White House official said in a background briefing on Feb. 2 that individuals would give up guaranteed benefits from the traditional system in exchange for private accounts. He said that a retiree would come out ahead if the personal account exceeded a 3 percent real rate of return after discounting inflation. This is the rate of return that Social Security trust fund bonds already receive. According to the Congressional Budget Office, private accounts would be, in fact, expected to produce a risk-adjusted rate of return of 3 percent above the inflation rate. Therefore, the automatic reduction of Social Security benefits would equal the entire income earned by the private accounts. In effect, the automatic benefit reduction would constitute a 100 percent tax on the retirement savings in those accounts. This “privatization tax” would cost many workers all or most of their private account benefit, subjecting them at the same time to needless risk. If a worker earned the real average rate of return assumed by the Bush administration (4.6 percent above inflation on a mixed stock-bond portfolio), the privatization tax would recapture an amount equal to 70 percent of the entire account, according to CBO. To voice your opposition to the privatization of Social Security, go to our Legislative Action Center.
