When Social Security reformers talk about switching to private accounts, they assume the accounts are feasible. But are they really?

"Backers aren't paying nearly enough attention to the costs and complexity of private accounts," says Dallas Salisbury, president of the Employee Benefit Research Institute in Washington, and a member of the National Commission on Retirement Policy.

Under the plan proposed by the NCRP, 2 percentage points of your personal Social Security tax (which is 7.65 percent for employees) would be diverted into a private account.

Private firms would manage the money supporting these accounts. You'd invest in giant mutual funds, indexed to the broad market for stocks and bonds. (An index fund mimics the performance of the market as a whole.)

At retirement, you'd be required to roll at least part of your private account into an annuity, which would give you a monthly income for life. Private insurers would bid for the right to offer these annuities.

Other reform plans would have you invest most or all of your money directly in retail mutual funds and handle your retirement withdrawals as if you had an IRA.

Now let's talk costs.

Today, employers incur the cost of collecting your Social Security tax and remitting it to the government sometimes daily, sometimes quarterly, depending on the firm. Once a year, employers send detailed W-2 forms, reporting on how much you earned and what was deducted for Social Security.

The easiest way to handle private accounts would be through employers. You'd tell your company where to send your 2 percent.

But this raises the company's administrative costs. About half the small employers would consider this a burden, according to a recent survey by the National Federation of Independent Business in Washington.

They'd rebel, if they had to inform employees of their investment choices and help people switch their money from one account to another. "Administering the plan is a nonstarter," says NFIB senior research fellow William Dennis.

Alternatively, your company might send your whole Social Security tax to the government. You'd have to tell Social Security how you wanted your money invested. (There'd be an automatic choice for people who didn't specify.) The government would credit your money to your chosen mutual fund and handle any investment changes you decided to make.

This approach minimizes the employer's cost. But it would require a huge expansion of Social Security. Currently, there are some 150 million Social Security accounts most of which are on automatic pilot. But millions of savers would demand individual attention if these were personal investment accounts.

The NCRP assumed that the overhead would be small. A modest record-keeping and money-management fee would be subtracted from everyone's private account (after a special, government appropriation for start-up costs).

But how small would the fees be, really? Record-keeping is only part of it. Social Security would also have to answer millions of questions about investing, create a massive investment education program (half of America doesn't know the difference between stocks and bonds) and handle all the money transfers.

At retirement, you'd also have to pay the cost of a private annuity.

At 2 percent of pay, some 40 million workers would contribute less than $80 a year to their accounts, Salisbury says. How big an annuity is that?

Expenses would run much higher if savers had to arrange for their own investments through independent mutual funds. But that would be prohibitively expensive for small accounts. In Chile's privatized system, costs run an average of 3.5 percent a year.

And here's a question: When would your money be invested?

Employers fill in W-2s only once a year. If the government handles the records, the 2 percent of your Social Security tax deducted during 1998 wouldn't be credited to your account until 1999, and might not be invested until the middle of '99. So you couldn't make quick investment decisions.

Finally, what would happen to the 2.4 percent of Social Security records (60 million last year) that can't be matched to individual accounts? These records land in limbo because Social Security numbers are wrong, paper documents are illegible or companies go bankrupt and don't report.

Currently, you find out about any missing years when you apply for Social Security benefits. Often, your account can be reconstructed. But how would you "invest" a missing private account, retroactively?

In theory, 150 million private accounts are doable. But no one is telling me how to do them yet.

Changes coming

America's retirement system is a vast web. Touch it in one spot and the pressure is felt in the furthest corners. When Social Security benefits are changed (note that I said "when," not "if"), the private pension system will be profoundly affected, too.

Some 40 million workers are covered by traditional pensions, according to the Employee Benefit Research Institute in Washington. When they retire, they'll get a fixed monthly benefit, depending on how much they earned and how long they worked for the company.

Some 46 million workers have 401(k)s and similar contributory plans.

The probable changes coming in Social Security have been telegraphed for several years. Payroll taxes may rise; benefits may grow more slowly than they do today; the retirement age may be increased; there may be private investment accounts.

But so far, the private sector hasn't paid much attention. Call it the Scarlett O'Hara syndrome (named after the heroine of "Gone with the Wind"). "I'll think about it tomorrow," Scarlett always says. "Tomorrow is another day."

Well, tomorrow is practically today. Some of the changes proposed in Social Security which could cause private plans to change include: lower future Social Security benefits, a later retirement age, investing part of each worker's Social Security tax in an individual account, and individuals being exposed to more investment risk.

"One thing is clear," Schieber says. "We would be better off if companies were planning for these changes now."

In 2002, the edge of the baby boom starts retiring. At this pace, a reformed pension system may wind up affecting only Generation X.

Syndicated columnist Jane Bryant Quinn can be reached in care of the Washington Post Writers Group, 1150 15th St., Washington D.C. 20071-9200.

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