Private investment plans have stumbled in states

WASHINGTON — President Bush believes Americans are so eager to join the "ownership society" that, given a chance, two-thirds of those eligible would divert money from Social Security into the personal investment accounts he proposes. But when public employees in a half-dozen states were offered similar accounts during the past decade, nowhere near two-thirds signed up for them. In many instances, the number was closer to 5 percent.

Bush argues that Social Security account holders could make more money for retirement on their own than they can count on from the New Deal-era fixed-benefit program.

But when Nebraska's state and county workers were given do-it-yourself accounts, they committed so many investment errors that they ended up making less than colleagues with fixed-benefit pensions — and less than what analysts said they needed for their old age. Their poor performance persuaded the Nebraska Legislature two years ago to junk the accounts for new employees.

While Americans are just beginning to grapple with the president's proposal for private accounts, employees and retirement officials in Michigan, Montana, Washington, West Virginia and other states have discovered that the accounts can fall far short of their promise.

The accounts Bush is proposing are not a precise match for the ones states have enacted in recent years. And the low sign-up rate for accounts among state workers may be due in part to the fact that more of them are covered by pensions than are American workers generally, so the state workers may feel less need for the accounts. But the tepid response in so many places casts doubt on one of the central premises of the Bush plan: that Americans are clamoring to join the investor class.

The poor performance of many of the accounts leaves experts to wonder whether even individuals who want to make their own retirement investments have the time or talent to do so successfully.

"If people have private accounts in Social Security and they're left to make the decisions themselves, the results likely will not be positive," said Anna Sullivan, executive director of the Nebraska Public Employees Retirement System, which replaced its private account system with a centrally managed plan in 2003.

"The vast majority of people don't have the inclination or comfort level to be responsible for their own retirements," said Joseph Jankowski, executive director of the West Virginia Consolidated Public Retirement Board, which is debating whether to drop the state's private-account plan.

The president's plan assumes that two-thirds of working Americans younger than 55 — an estimated 90 million people — would quickly shift a substantial chunk of the payroll-tax money that goes to Social Security into private investment accounts beginning in 2009.

But of more than 1.5 million public employees offered the choice of accounts at various points in the past decade, only about 125,000, or 8 percent, have signed up. The sign-up rate in most states has been about 5 percent.

The White House argues that Social Security is likely to require painful cutbacks to avert financial ruin. And it hopes private accounts would help ease the pain when benefits from the traditional part of the system are reduced.

Social Security and traditional pensions are "defined benefit" systems, meaning the worker is entitled to a predetermined level of benefits; the employer or the government — not the individual — manages the money, bears the economic risks and makes sure people get certain fixed benefits in retirement, come what may.

By contrast, the accounts that Bush is proposing would be "defined contribution" arrangements similar to 401(k) plans. In these plans, the employer's responsibility ends with a fixed contribution to a worker's account. From there on, it is largely up to individuals to bear the risks and reap whatever rewards may result.

The biggest test of private accounts' popularity has come in Florida, where Gov. Jeb Bush, the president's brother, proposed replacing public employees' defined-benefit pensions with a mandatory defined-contribution plan. Although he compromised on a voluntary plan, state officials predicted a stampede.

Early surveys of Florida's 600,000-plus public employees suggested that more than half would go for the accounts. But so far just 43,000 employees, or about 7 percent, have enrolled.

"The stock market can't be trusted the majority of the time," said John Miller, 44, a clerk with the state's Department of Highway Safety and Motor Vehicles in Tallahassee, Fla., who chose not to take the governor's offer.

A review of other states' experiences turned up a pattern strikingly similar to Florida's. Even when states offered big inducements, the response to accounts was generally anemic.

In switching to investment accounts, many states have hoped to save money, as Gov. Arnold Schwarzenegger is proposing in California with a plan to switch public employees to private accounts starting in 2007. But some, including West Virginia and Michigan, are either seeing no savings or have actually lost money so far on the switch.

When it comes to people's investment abilities, state retirement officials have plenty of stories about how ill-prepared most workers are to handle the financing of old age.

"We get individuals into our training sessions and ask them about basic investment terms — What is a stock? What is a bond? — and they rate themselves as practically unknowledgeable," Washington state retirement director John Charles said.

The result, Charles and others said, has been a series of investment choices by workers that officials fear will leave many people without enough money after they retire.

In Washington state, workers' decisions for or against accounts seem to have been heavily influenced by the immediate performance of the stock market, rather than a long-term perspective on their investments.

In 1996 and 1997, when the stock market was climbing, more than 75 percent of teachers picked a hybrid plan that included an individual account, rather than sticking with traditional pensions. In 2002 and 2003, after the market had crashed, by contrast, about 14 percent of public employees signed up for the hybrid plan.

It is Nebraska that has provided perhaps the most telling experiment in private-account investing.

The state pioneered accounts for public employees in 1964 but restricted them to state and county workers. Teachers, judges and others were left in traditional pension plans whose assets were professionally managed.

Thirty-five years later, a consultant working for the state discovered that individual account holders were making between 6 percent and 7 percent a year on their money, while the investment professionals who handled the state's pension assets earned 10.5 percent to 11 percent.

"People weren't eating, sleeping, drinking investment all the time, so they didn't get the results the professionals did," said Sullivan, the state retirement director.