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Ketchikan Daily News By Lew Williams
The AARP, a senior citizens' organization, is wrong to oppose President Bush's plan to allow wage earners under 55 to put 4 percent of their Social Security payroll taxes into personal accounts. That tax is officially known as the Federal Insurance Contribution Act, or FICA for short. It is 12.4 percent of a paycheck, one half paid by the wage earner and one half by his or her employer, on wages up to $90,000 a year.
The Bush plan won't affect most of AARP's membership, which is limited to those over 50. Personal accounts would be open only to those younger than 55. At that, the plan is optional. Social Security benefits are unchanged for those over 55. Those under 55, especially those just entering the workforce, should consider the Bush plan carefully.
All FICA money goes to the federal government. At 62 or 65, the wage owner receives a Social Security check based upon his or her highest salary in recent working years. If he or she dies at age 60 or 61, too bad. The money stays with the federal government except for $255 paid as a death benefit.
If the wage earner dies before retirement and leaves a dependent spouse and/or dependent children under 18, a benefit is paid to the survivors. There are also provisions for disabled workers so Social Security is more than a retirement plan.
Many people don't live long enough to enjoy a Social Security check. Some die without dependent spouses or children so accumulated payroll taxes stay with the federal government. The obituaries in the Anchorage Day News for a recent 10-day period listed 88 deaths, 55 had lived long enough to draw a Social Security check at 65.
Those opposed to the president's plan conjure visions of a wage earner taking his or her personal account to Vegas and blowing it, or losing it in the stock market. There are restrictions now barring careless use of 401(k) and IRA funds. Restrictions are possible on personal accounts and still give the account holders options to bolster their Social Security benefits on retirement and to leave an estate to heirs.
Those fearing the stock market should do something about the Alaska Permanent Fund. Or, maybe not. Its average annual earnings for the last 20 years has been 10.1 percent - 14.3 percent in 2004 alone - and 37 percent of the fund is invested in U.S. stocks.
Alaska wage earners might not be able to invest their personal accounts in the fund, but the fund's success tells wage earners where to go if life insurance, mutual funds and annuities don't attract them.
AARP's stand is surprising. It offers mutual funds through Scudder Investments into which wage earners could put a portion of a personal account.
In checking with three Alaska financial advisors, one says life insurance would be an attractive investment for personal accounts. In a hypothetical situation, an 18-year-old could put $1,000 a year of payroll taxes into a universal life policy. That would insure the wage earner's life for $250,000 - a lot better for survivors than $255 in the event of an early death. And the surviving spouse and dependent children still would receive Social Security benefits financed by the balance of the payroll taxes that didn't go into the personal account.
If the wage earner lived to 65, the cash value of his or her personal account would be $348,177, which if put into an annuity would give the retiree, $2,067 a month for life to bolster his or her Social Security income.
There always will be Social Security. In future years, solvency could require reducing benefits or increasing taxes, especially if it loses money to personal accounts. However, the prospect of more money in a personal account would silence those earning above $90,000 a year if the wage cap is lifted, in effect raising taxes to assure solvency without cutting benefits.
Younger workers should talk with a financial advisor instead of listening to AARP and others with an agenda or a dislike for the Bush administration, before joining the protesting chorus on personal accounts.
Lew M. Williams Jr. is the former publisher of the Ketchikan Daily News.