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Posted 10/4/2004 11:30 PM     Updated 10/5/2004 1:23 AM
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Establish tax-free personal investment accounts
Proposal: Let workers divert some of their Social Security taxes into private retirement accounts in exchange for reduced benefits.

The government now deducts taxes from workers' paychecks for Social Security and Medicare. This proposal would divert money from Social Security and possibly Medicare into private accounts that invest in stocks, bonds and mutual funds. The tax-free accounts would grow through investment returns and be available to provide retirement income, pay for medical expenses or pass on to heirs.

Although individuals would own the accounts, the government would handle bookkeeping under most proposals.


Today's medical savings accounts and individual retirement accounts are early versions of what the accounts might look like.

Under other Medicare proposals, the federal government would pay a fixed amount, like a voucher, to provide standard medical coverage. The government would define what is covered, but private insurers would sell the policies. If a person wanted a better policy — more coverage, lower deductibles — he or she would pay the extra cost. In theory, tax breaks from medical savings accounts could help people pay for more coverage than a cost-conscious government can afford.

Support: President Bush, other Republicans and business groups are the strongest backers of investment accounts. Democrats generally oppose the idea.

Strengths: Tax-free savings accounts would encourage individuals to save more, spend less and be responsible for their own future. The accounts could earn higher returns than Social Security contributions do now.

A Medicare voucher system would let the government decide on a budget and stick to it — the same way defense, education and other programs are budgeted. Taxpayers will spend about $7,500 per Medicare beneficiary in 2004. Congress could set the voucher next year at $6,500 to save $25 billion.

Weakness: Diverting Social Security taxes into private savings accounts would cost the system $250 billion or more in the first 10 years under most proposals. But Social Security costs would not be reduced until decades later when today's young workers retire to lower benefits. Even then, the government might be expected to bail out people whose investments fared poorly.

Medicare vouchers save money only if government is tightfisted. The elderly would have to pay more, and that could result in second-class medical care for those who aren't wealthy. Higher medical expenses could drive some seniors into poverty — and push them onto Medicaid, the government's health program for the poor. Tax-free savings accounts favor the wealthy, who have more to save.

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