President Bush proposed sweeping changes to the Social Security system Wednesday night that would include the establishment of voluntary personal retirement accounts whose investment options are regulated by government.
In his State of the Union address, Bush said workers would eventually be able to contribute up to 4% of their payroll taxes into the accounts, which he compared to the existing thrift savings plans offered to federal employees.
The proposal wouldn't affect anyone born before 1950.
Predicting the current Social Security system will be bankrupt by 2042, Bush said: "We have to move ahead with courage and honesty, because our children's retirement is more important than partisan politics."
The president said he would entertain any and all proposals on the subject, but insisted on several basic principles. He said any changes to Social Security must be "permanently sound," not result in higher payroll taxes or threaten the benefits of people retiring now, and be gradual.
The plan must also ensure that "lower-income Americans get the help they need to have dignity and peace of mind in their retirement," he said.
"As we fix Social Security, we also have the responsibility to make the system a better deal for younger workers. And the best way to reach that goal is through voluntary personal retirement accounts," Bush said.
Any overhaul of Social Security will require enormous political will to pass, particularly with key aspects -- including the structure for low-income Americans and the cost of setting up the private accounts -- unspecified.
"There's a lot we can do to improve Americans' retirement security, but it's wrong to replace the guaranteed benefit that Americans have earned with a guaranteed benefit cut," said Senate Democratic Leader Harry Reid of Nevada. "The Bush plan isn't really Social Security reform. It's more like Social Security roulette."
Bush laid out several guidelines for the private accounts, including an insistence that money invested "can only go into a conservative mix of bond and stock funds" and "not be eaten up by hidden Wall Street fees." The invested money would be paid out over time, not "emptied out all at once."
One benefit of the plan, Bush said, would be that owners would be able, at their option, to pass invested money on to children and grandchildren. Another is that the plan "offers a greater rate of return than anything the current system can deliver."
The president depicted a grim destiny for the existing system if it is left unchanged.
"With each passing year fewer workers pay ever higher benefits for an ever-larger pool of retirees," he said. "In 2018, Social Security will be paying out more than it takes in, and every year afterward will bring a new shortfall bigger than the year before."
By 2027, an extra $200 billion will be required annually to keep the system afloat; the sum will grow to $300 billion by 2032. "By 2042, the Social Security system will be bankrupt," Bush warned.
Bush listed a series of previous proposals that he said were still on the table, including indexing Social Security payments to prices rather than wages; increasing the retirement age; and discouraging the early collection of benefits.
"The system on its current path is headed toward bankruptcy, so we must join together to strengthen and save Social Security," Bush said. "For younger workers the Social Security system has serious problems that will grow worse with time."