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Bush to change account formula?
Report: White House may make proposed Social Security accounts more attractive.
March 24, 2005: 7:05 PM EST
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NEW YORK (CNN/Money) The Bush administration is said to be considering a change in its proposal for individual Social Security accounts that would make them more attractive to workers, according to a report published Thursday.

Administration officials may consider proposing a lower offset rate, according to an interview in the Wall Street Journal with Allan Hubbard, the director of the National Economic Council and assistant to the president for economic policy.

The offset formula determines the amount by which a worker's traditional defined benefits would be reduced if he chooses to divert a portion of his payroll taxes into an individual investment account. (Under Bush's proposal, contributing to individual accounts would be voluntary.)

A lower offset rate increases the chances that workers with accounts would fare better than if they stayed exclusively with the traditional system.

In February, the White House proposed an offset formula that would reduce benefits by an amount tied to a worker's account contributions plus a rate of return equal to that of the Treasury bond, currently estimated at 3 percent.

So a worker would need to earn more than 3 percent a year above inflation (assumed to be 3 percent) and expenses (estimated by the White House to be 0.3 percent) to come out ahead of just staying in the traditional system.

That means his investment account would need to earn more than 6.3 percent, not adjusted for inflation.

That's not an impossible hurdle, but it's also not an easy one.

Some market observers expect stocks and bonds to return less than their historical averages in the coming decades. The Journal noted that Treasury bonds are expected to return roughly 2 percent and stocks a few percentage points more.

Hubbard told the Journal that 3 percent was chosen because that is what actuaries estimate will be the government's cost of long-term borrowing, making the accounts "fiscally neutral."

"One could argue 2 percent is more appropriate. But that actually changes over time, it's not fixed," Hubbard said. "If there's a consensus [that] it's appropriate that it is a lower rate, obviously we'd be open-minded to that."

A former administration official told the paper that the White House has discussed an offset rate between 2 percent and 3 percent, with particular focus on a rate of 2.7 percent.

Lowering the offset rate would improve worker's chances of doing better with an individual account. But it may increase the costs of creating the accounts in the first place.

Those costs have been a huge bone of contention with critics of the president's guidelines.  Top of page

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