Bush's Social Security plan would reduce government guarantee for younger Americans

Associated Press Writer

WASHINGTON - The Bush administration unveiled a host of details about its proposal to add personal accounts to Social Security, but key questions remain unanswered, including how much guaranteed benefits will be cut and how the plan will be paid for.

Under the proposal outlined by President Bush and his aides Wednesday, Social Security benefits would not change for retirees or wage-earners age 55 or older.

But the future government guarantee would be reduced for younger workers whether or not they set up personal accounts, but more for those who choose to divert some of their payroll tax to a personal account.

Eventually, Bush envisions permitting younger workers to invest two-thirds of their payroll taxes in the new private accounts. They would be required to purchase an investment that, when combined with a monthly Social Security check, would keep their income above the federal poverty level during retirement.

Bush's aides outlined selected details as he sketched his proposals in broad terms in his State of the Union address.

They omitted other material, declining to say, for example, how large a reduction in guaranteed benefits would fall on younger workers. Some estimates put it at more than 40 percent, although Republican aides stressed that any drop should be offset, at least partially, by income from personal investments.

Nor did the administration say how it would cover the so-called transition costs to a remodeled Social Security program, which it pegged at $750 billion over a decade.

Aides said Bush was not submitting legislation to Congress, responding to requests from Senate GOP leaders that he give them leeway to fashion a measure that can pass.

"I will listen to anyone who has a good idea to offer," the president said.

Democrats, in the minority in both the House and Senate, said they would oppose Bush's proposals, and they sat in stony silence when he outlined his case for personal accounts.

"Democrats are all for giving Americans more of a say and more choices when it comes to their retirement savings. But that doesn't mean taking Social Security's guarantee and gambling with it," said Senate Minority Leader Harry Reid, D-Nev.

Senate Democrats were sending Bush a letter Thursday urging him to limit borrowing in crafting Social Security legislation, saying it would be immoral to pass this debt onto future generations.

Administration officials acknowledged that the private accounts do not solve Social Security's long-term financial woes.

Without any changes, the program, established in 1935, is estimated to begin paying out more than it collects as early as 2018. In 2042, according to the program's official estimate, its trust funds will be depleted and benefits will be paid entirely from current tax receipts. At that point, checks are predicted to be only 73 percent of the amount now promised.

Under the Bush plan, individuals born in 1949 or earlier would stay in the current system without changes. Current retirees oppose personal accounts, according to a variety of polls. By setting the age cutoff at 55, Bush showed he was looking to ease the concerns of a politically pivotal group as he seeks to build congressional and voter support for far-reaching changes in the Depression-era program.

For younger workers, the option of new personal accounts would be phased in over three years. Those born in 1965 or earlier could begin participating in 2009. Those born in 1978 and earlier could begin the next year. In the third year, all eligible workers could open personal accounts.

Once workers opt for personal accounts, they could not move back into the traditional system, though they could move their money to low-risk government bonds.

The Bush plan would allow workers to divert about two-thirds of their payroll taxes into these accounts. The remaining payroll taxes would continue to go into the Social Security trust funds, as would the entire 6.2 percent payroll tax paid by employers.

To hold down the lost income to the Social Security trust funds, individual contributions would initially be capped at $1,000 per year. That figure would rise by $100 a year until all workers could invest the full 4 percent.

Those who choose to participate would have a limited set of investment choices, similar to those available in the Thrift Savings Plan, a retirement system for federal workers.

As workers neared retirement, they would automatically be enrolled into a "life cycle" account in which investments become more conservative as investors age. Those wanting a more aggressive investment would have to acknowledge the risks in writing.

The government would be responsible for keeping track of how much money is in each worker's account, a proposal aimed at keeping administrative fees low. The administration estimates annual administrative fees would total 0.3 percent of each account balance.

As their work years end, all workers with personal accounts too small to assure retirement income above the federal poverty level when combined with their monthly government check, would be required to purchase an investment annuity to guarantee such a level.

However, any money put into an annuity could not be passed on to heirs - and polling shows that inheritability is one of the most persuasive arguments for personal accounts.