Wednesday, April 27, 2005

The Not-So-Different Bush SSI Plan

In order to ensure retirees did not outlive their 'personal accounts' the Bush plan would require retirees to annuitize some, if not all of their personal accounts. This means that once the retiree (annuitant) dies, the rest of it will evaporate and there will be nothing to bequest to children or spouses. So, the whole notion that there would be something to leave to your kids is bunk for many Americans. At least with SSI, there are survivor benefits. With Bush's plan, there would be nothing. Bush's plans gets worse day by day.

Bush Plan Would Make Some Buy Annuities
By LAURA MECKLER, Associated Press Writer

WASHINGTON - It sounds appealing: Create your own personal account with Social Security taxes, and when you die, leave the money to your heirs.

It will belong to you, President Bush and his allies say repeatedly. You'll own it.

But many retirees will have to use a big chunk of their nest egg to buy an annuity, which guarantees a monthly income but disappears when you die.

Retirement planning is a balance between personal control and financial security, experts explain, and to get one, you give up the other.

"It's an unavoidable trade-off," said Jeffrey Brown, a finance professor at the University of Illinois at Urbana-Champaign who served on Bush's 2001 Social Security commission.

Social Security today is essentially a giant insurance program, or one big annuity. The people who die early subsidize those who live a long time.

The Bush plan is all about ownership. Younger workers could divert up to two-thirds of their Social Security taxes into private retirement accounts. When they retire, the money in those accounts is theirs — they can spend it, save it, leave it to heirs.

But there's a hitch, and it deals with financial security. Bush would make many people tap those personal accounts to buy life annuities sufficient to prevent them from slipping below the poverty line in retirement. Beyond that, others might want to buy annuities to be sure they don't outlive their money.

"People definitely want security," said Virginia Reno, vice president for income security at the National Academy of Social Insurance. "Ownership and individual responsibility has its appeal, but it also brings the risk you can make mistakes. You simply don't know whether you're going to die soon, whether you're going to live a long time."

Annuities have become a significant piece of the life insurance market, now accounting for just over half of all premiums. They come in a variety of packages, but in a life annuity, a client pays a lump sum and in exchange is guaranteed a certain monthly payment until he or she dies. The payments are determined by a variety of factors, including interest rates and the client's age and health.

Like Social Security today, annuities provide security. But they sacrifice ownership.

"When you annuitize your resources, you completely give up the right to have access to that wealth. You can't leave it as a bequest," said Brown, an expert on annuities.

(Full Story)

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