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Bush pushes hard for personal accounts
The president added some clarity to his reform plans in the State of the Union address, but many of the tougher details are still to be worked out.
By Rick VanderKnyff
President Bush used his annual State of the Union address Wednesday night to make a strong appeal for private accounts as part of a revamped Social Security, making reform of the system the signature domestic issue of his hour-long speech.
"Fixing Social Security permanently will require an open, candid review of the options," Bush said. "I will work with members of Congress to find the most effective combination of reforms."
Observers hoping that he would use the occasion to spell out specifics on his plans may have come away disappointed, however. "All options are on the table," he said, after listing several proposals (from raising the retirement age to cutting benefits for wealthier retirees) made in the past by prominent Democrats.
The speech did show, though, that the president is not backing down from the issue, despite sharp attacks from opponents and skepticism even within his own party.
'Basic principles'
While declaring himself willing to "listen to anyone who has a good idea," he did lay out what he called a set of "basic principles" for any reform proposal- To make Social Security "permanently sound."
- To avoid increasing payroll taxes.
- To preserve promised benefit levels for retirees and "near-retirees" (workers now 55 or older).
- To ensure that any changes are gradual "so younger workers have years to prepare and plan for their future."
What the president didn't talk about was how to pay for a transition to private accounts, or how much the benefits of future retirees might be cut under his proposal. More details may be available Monday, when the president is due to release a proposed budget.
The president kept his focus on his proposal to allow workers to divert a percentage of their current payroll tax -- 4% of gross income -- into a "personal account," with the rest flowing into the current system. He has said that participating workers would choose from a limited menu of relatively conservative investment options and the government would work to keep administrative costs low. The plan would also limit withdrawals.
Though Bush called Social Security a symbol of the trust between generations," he has been a proponent of partial privatization since the 2000 campaign -- though he didn't begin putting his political muscle behind reform until his recent re-election. In recent months, he has cast Social Security as a system in crisis and on the verge of bankruptcy.
'Headed toward bankruptcy'
Social Security faces challenges prompted by the nation's changing demographics. In the current pay-as-you-go system, payroll tax paid by today's workers pays the benefits of current retirees, with the surplus going into a trust fund (where it is invested in Treasury bonds).
Estimates vary, but because the population is aging and fewer workers are supporting a growing number of retirees, the amount paid out in benefits could surpass the amount coming in from payroll taxes by 2018. By 2042, under the Social Security Administration's "pessimistic" scenario, the trust fund could be depleted, and the system would not be able to meet its promised benefit obligations.
Bush and his advisors believe private accounts would help stabilize the system over the long haul. Currently, 6.2% of a worker's salary (up to a limit that is adjusted annually) goes toward Social Security, matched by an equal amount paid by the employer.
The president promised "careful guidelines" for personal accounts, all of which have been floated in recent months, including:- Allowing investing in only a "conservative mix of bonds and stock funds."
- Low administrative fees.
- Restraints on how and when the money can be taken out
As anticipated, Bush did endorse 4% of salary as the amount that workers could eventually divert into a personal account. That matches one oft-cited proposal floated in a 2001 report by a presidential commission. (To see how private accounts might work in real life, click here.)
A transition to personal accounts would mean a shortfall in the money needed to pay current retirees -- a shortfall of up to $2 trillion over 10 years, according to government estimates.
Also, private accounts alone would not take care of the funding shortfalls expected in the coming decades. The White House has floated a proposal to trim benefits growth by changing the way initial benefits are calculated. (To see how this could affect your benefits, click here.)
Focus on accounts
On Wednesday, however, Bush steered clear of these more politically sensitive topics and any dollar specifics to focus on the overall benefits of personal accounts.
"Here is why personal accounts are a better deal," he said in the nationally televised address. "Your money will grow, over time, at a greater rate than anything the current system can deliver -- and your account will provide money for retirement over and above the check you will receive from Social Security. In addition, you'll be able to pass along the money that accumulates in your personal account, if you wish, to your children or grandchildren. And best of all, the money in the account is yours, and the government can never take it away."
Republicans in the chamber applauded the last line, while Democrats remained quiet. The president's claim that the system is headed toward bankruptcy was met with some vocal disagreement.
While the president and some cabinet members planned to hit the road Thursday for several days of stumping for reform, opponents of his privatization plan were already broadcasting their displeasure in the hours before the address. "The Bush plan isn't really Social Security reform," Senate Minority Leader Harry Reid, a Nevada Democrat, told reporters. "It's more like Social Security roulette."
The politically potent AARP has also signaled its strong opposition to any move to personal accounts, but GOP lawmakers are in a precarious spot -- caught between a determined president and skeptical constituents. Their response to reform proposals so far has been lukewarm at best.
Bush said on the day after re-election that he was ready to spend his political capital on Social Security reform. Whether his Republican colleagues are ready to spend theirs will be seen in the coming weeks and months.
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