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On Personal Finance | A look at Social Security cuts

How would President Bush's Social Security proposals affect you?

Too soon to tell. Although the President has been talking about the issue for five years and appointed a commission that made proposals in 2001, his detailed plan is still some weeks or months off.

But in his State of the Union address Wednesday and the subsequent campaign swing to drum up support for changes to Social Security, he did reveal a bit more.

It's clearer now, for example, that there are two types of benefit cuts on the table.

First, there are cuts that could be imposed on all Social Security beneficiaries as the government tries to close the gap between payroll taxes received from workers and payments made to retirees. The President listed several options that I'll get to in a moment.

Second is the additional cut in traditional "guaranteed" benefits for people who would participate in the voluntary private investment accounts Bush has proposed.

At a news conference Wednesday, an administration official described private accounts as, in effect, a kind of loan from the government to individuals. Participants would have to pay it back - with interest.

It would work like this: In the first year, you could invest up to $1,000 in any of a handful of stock and bond mutual funds approved by the government. The $1,000 would come from the Social Security tax that already is deducted from your paycheck. Now, most of that money is used to pay current retirees' benefits. The surplus goes into a trust for future benefits.

Under Bush's proposal, you could retire in, say, 20 years with a nest egg built up in your personal investment account. In addition, you'd start getting a guaranteed monthly Social Security benefit, just as you would if private accounts weren't offered or you chose not to have one.

But if you did have a private account, that Social Security check would be smaller than it would be if you didn't have it.

The size of that reduction would be based on the amount you'd invested in the private account and the interest charges that had built up over the years you had that "loan." For the private account to make sense, the investments in it would have to grow enough to offset the cut in the regular benefit.

To do this, your private account would have to earn 3 percent a year above the inflation rate, the administration official said.

Thus, if inflation averaged 3 percent a year, you'd have to earn 6 percent or more each year in your private-account investments for that option to pay. Earn more than that and you'd come out ahead; earn less and you'd end up behind.

Keep this in mind: Even if you choose not to have a private account, the ordinary benefit would likely be smaller than what you're promised by today's system because of changes that probably will be made to close the projected funding gap.

Read more.

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