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Social Security proposals restrict investors

President Bush has often said he wants to create private investment accounts as part of the Social Security program because it would give Americans "ownership" of their government retirement funds.

On Friday, when members of Bush's Social Security commission began to debate the details of private investment accounts, it quickly became clear that the rights and privileges of ownership would be very limited. Among the restrictions discussed:

Investment options would be limited to five conservative index funds.

The distribution of a person's money among these optional funds could not be changed more than once a year.

It would take an average of 15 months for money taken out of a person's paycheck to be actually invested in an individual fund. In the interim, the cash would likely go into a common money market fund offering lower interest.

Workers would not be permitted to borrow from their fund, even in times of serious emergency. Nor could they take a lump-sum payment from the fund when they retire.

Divorced couples would be required to split in half the money invested and the earnings derived from those investments during the years they were married.

None of these restrictions are guaranteed to become law. The 16-member commission will make recommendations to Bush in December, and then the president is expected to give the report to Congress as a blueprint for reforming Social Security.

But commission members said these limitations would be necessary if Congress decides to allow Americans to set aside a small portion of their Social Security payroll taxes to invest in private investment accounts, as Bush has proposed. Without them, commission members said, the plan would be too expensive to administer and would not create a reliable retirement income for American workers.

Critics of the president's initiative have long argued that the high administrative costs of such a program would deprive investors of a good return. But members of the commission estimated that such a fund could be administered for a cost to individual investors of $13 a year.

"We can do this at a relatively low cost," said Robert C. Pozen, a commission member who also is vice chairman of Fidelity Investments.

Bush proposed the creation of private accounts as a way to improve the solvency of the program, which is expected to slip into the red in 2016 as a growing number of baby boomers retire. Experts think the income generated by private investments would compensate future retirees for what will be a necessary cut in the standard retirement benefits.

Former Sen. Daniel P. Moynihan said the commission's plan also could remedy the current inequities in the Social Security system, which allow many retirees _ most of them women _ to live in poverty.

Not only does the commission favor allowing men and women to evenly split their investment income upon divorce, but it also seems inclined to allow women who leave the work force during their child-bearing years to continue contributing to their investment accounts while unemployed.

At present, according to Robert Johnson, a commission member and chairman of BET Entertainment, white American families have an average net worth of $300,000 while African-American families average only $30,000. He said private accounts would increase the personal wealth of African-Americans, and teach inexperienced investors how to create their own investment portfolios.

Not all of the commission members supported imposing strict limitations on the private accounts. Johnson said he thought investors should be allowed to borrow from the funds in times of emergency or to withdraw all of their assets upon retirement if they wanted to start a new business.

But several members disagreed with Johnson, saying that lump-sum withdrawals or loans from the funds would undermine the primary purpose of the program, which is to finance retirement, and reinforce the criticism of those who have portrayed the creation of private accounts as a risky scheme.

Although some members expressed disappointment with the proposed 15-month lag in the time it would take for the government to deposit payroll taxes into private investment accounts, former Rep. Bill Frenzel, a commission member who works as a guest scholar at the Brookings Institution, said the delay is necessary in order to avoid imposing more federal paperwork requirements on small business owners.

Basically, the commission's proposal is patterned on the current 401(k) retirement investment program provided for federal workers. But many important elements of the commission's plan are still to be decided. For example, commission members have not yet disclosed what percentage of payroll taxes they would allow to be invested in private accounts. Many experts have talked about limiting it to 2 percent.

Nor have commission members decided how they would modify regular Social Security benefits for future retirees in order to save money and guarantee the solvency of the fund beyond 2016.

Although most Democrats oppose creating private accounts as part of the Social Security system, the commission members are evenly divided between Democrats and Republicans. All of the appointees to the commission are advocates of private accounts.

At the start of Friday's meeting, several Democratic commission members challenged their party to stop simply criticizing the idea of private accounts and, instead, offer a realistic alternative. "We have to go beyond pandering and demagoguery," said Sam Beard, a Democrat and founder of a group known as Economic Security 2000.