A Short Course in Private Accounts

President Bush talked a lot during the election campaign about reforming Social Security by allowing younger workers to divert some of their payroll taxes to private investment accounts, but most Americans probably have little idea what these private accounts would look like.

Fortunately, it's laid out by the 2001 Commission to Strengthen Social Security, a bipartisan group President Bush appointed to suggest ways to shore up the system and help workers by creating voluntary private accounts. During the recent presidential campaign, he made it clear that these accounts are for younger workers, not those close to retirement.

The commission came up with model private accounts, which are intended to give workers greater benefits than those paid to today's retirees and "to build substantial wealth."

Commission co-chairmen, the late Daniel Patrick Moynihan, who served as a U.S. senator for New York, and Richard D. Parsons, chairman and CEO of Time Warner (TWX), even offered the following projection, which sounds a bit like a tout from a mutual fund company.

A 21-year-old worker with the U.S. median income of $35,277 in 2001 who diverted 1% of his annual earnings (or $352.77) into a diversified private account with an average annual return of 4.9% would at age 65 have a portfolio worth $523,000 (or $101,000 in constant 2001 dollars). "A two-income earner family," the chairmen suggested, "could easily have an expected net 'cash' worth of $1 million."

But workers shouldn't expect to play the stock market with their private-account investments -- or buy a retirement dream home with their cool millions. It might be their money, but the government would still call the shots.

The commission recommended that workers' investments be strictly limited to core, index-style funds, to protect them from making poor choices. And workers should also be forbidden from taking most of their money out in a lump sum upon retirement. Instead, the group urged that they be required to annuitize a major portion of their funds, so the money provides them monthly payments for life like a Social Security pension.