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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

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, 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.

The three private-account models the commission created assume that workers will still receive Social Security benefits, though the amount differs with each model.

"The real concern I have is that we strengthen the 'first pillar,' not trash it," says commission member Olivia S. Mitchell, a professor with the Wharton School at the University of Pennsylvania and an expert on pension plans.

The notion of being able to have at least some control over private accounts is meant to be a selling point to today's younger workers, says Mitchell, who notes that many believe that Social Security won't be there for them when they retire.

How the Plans Work

The plan that has attracted the most attention is known as Model 2, which would permit the largest investment from workers.

Currently, workers contribute 6.2% to Social Security through payroll taxes each year on wages up to $87,900 in 2004, with employers kicking in another 6.2%. (The self-employed pay the full 12.4%.)

Model 2 would allow workers to redirect 4% of their payroll taxes, up to $1,000, annually to a personal account. The limit would be indexed to wage growth every year.

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Accounts would be managed under a two-tier system at a low cost to workers. At first, when the accounts are so small that having them administered by a private company would be too costly and cumbersome, they would be closely overseen by a federal administrator or governing board.

The money would be invested in either a combination of five index funds or in a balanced fund, a mix of corporate stocks, corporate bond and government bonds. There would be three balanced funds: conservative, medium and growth.

The funds themselves would be operated by private-sector companies. Although they are not named in the report, they would likely be companies such as Vanguard,


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Once the accounts reach a certain balance, say $5,000, they would be transferred to the second tier, to be invested by private-sector financial services companies that specialize in managing 401(k) plans, but still overseen by the governing board. Again, they are not cited by name, but such companies could include Fidelity, Vanguard,

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Once worker accounts move to the next level, known as tier II, they would probably have the same choice of basic index funds as in tier I, and of other broadly diversified mutual funds certified by the governing board. Workers would be allowed to change their investment mix once a year.

While individual workers would have some choice about how to invest their money, they would not have access to it before they retire, even for hardship circumstances, just as they can't borrow against Social Security now. Unlike Social Security, however, any money in private accounts would be passed on to heirs.

Because the purpose of private accounts is for their owners to have retirement income, the commissioners urged that account owners be prevented from taking their savings as a lump sum when they retire. This, they said, could lead to retirees depleting their savings and having to fall back on government programs for assistance.

So the commission recommended that upon retirement, private account holders be required to take at least some of their money in the form of gradual withdrawals, that is, as an annuity or income for life like Social Security. The governing board would be expected to offer different kinds of annuities, which are essentially contracts, to the newly retired.

So what might all this look like in dollar and cents for American workers?

In 2001, the commission noted that a typical low-wage worker retiring that year received $7,644 in annual Social Security benefits, while a medium-wage worker got $12,624 and a high-wage worker, $16,392.

For the purposes of projecting future benefits, the commission assumed that worker contributions to private accounts began in 2002.

Under the Model 2 plan, with a voluntary 4% annual diversion of funds to a private account, the commission projected that a worker who retired in 2032 would receive both a Social Security benefit and an annuity from the proceeds of the private account.

Using constant 2001 dollars, the low-wage worker would receive $11,160 annually, the medium-wage worker would get $15,444, and the high-wage worker, $19,680. The workers, with the boost from their private savings, would theoretically receive more than those who retired in 2001: 46%, 22% and 20%, respectively.

For those workers retiring in 2052, when Social Security is projected to be running a 27.6% shortfall, the idea is that their private accounts would help offset the system's losses and still provide a higher return than retirees in 2001 got.

Starting in 2052, the low-wage worker would have combined Social Security and annuitized private-account monthly benefits of $13,608 in 2001 dollars, while the medium-wage worker would have $20,016, and the high-wage worker would have $24,684, an increase of 78%, 59% and 51%, respectively over 2001 retirees without private accounts. Of those totals, the Social Security system is projected to pay $8,568, $14,148 and $18,696 respectively.

Under this plan, Social Security benefits would be increased to some lower-income workers. A minimum benefit of 120% of the poverty line would be paid to minimum-wage workers who are employed at least 30 years.

If private accounts become reality, the government will need a way to replace those funds. Social Security is a "pay as you go" system, meaning that today's workers pay money in to support today's retirees. When some of that pay is taken out of the loop, there's a shortfall.

And of course, the commission report notes that there will need to be "temporary transfers from general revenue" to keep the Social Security Trust Fund solvent between 2025 and 2054. That's when the vast number of baby boomers overwhelm the system, because the younger generations in the workforce are too small to support prior ones under the pay-as-you-go system.

Once those challenges are met, the commission noted optimistically, Model 2 should achieve a positive cash flow at the end of 75 years.

Other Models

Model 1 allows workers to invest up to 2% of their wages in a personal account, but no other changes are made to Social Security. Additional money is needed to keep the trust fund solvent starting in the 2030s.

With Model 3, workers who choose to invest 2.5% of their payroll tax, up to $1,000, to a private account will have that amount matched, provided they contribute an additional 1% above their Social Security payroll taxes to the account.

This model would require that benefits for early retirement be decreased. In addition, the trust fund would need a cash inflow to remain solvent between 2034 and 2063.