In his State of the Union address Wednesday, President Bush outlined his plan to add individual accounts to Social Security, the venerable old-age retirement system. Bush's case for change has been attacked by Democrats as alarmist and unbalanced, and many questions about the president's plan remain unanswered and subject to negotiations with Congress.
Social Security, created in response to the pervasive poverty during the Depression, is designed to provide workers with a basic level of income in retirement, as well as disability and life insurance while they work. The benefits are progressive, meaning lower-income workers get a relatively better deal than higher-income workers; however, workers making above a certain salary ($90,000 this year) do not have to pay Social Security taxes on any income above that level, which means they put a smaller proportion of their earnings into the system.
On a tour to promote his Social Security initiative, President Bush greets supporters in Fargo, N.D.
(Larry Downing -- Reuters)
Here is a guide to the debate and the broad outlines of the president's plan.
Q How is Social Security currently financed?
About 96 percent of workers must pay a certain amount of their paycheck, generally 6.2 percent, to the system, an amount that is matched by their employers. (Some state and local workers do not participate in Social Security.) Social Security is a pay-as-you-go system, which means that payments collected are immediately used to pay benefits. Currently, more payments are being collected than are needed for benefits. So, the system is lending the money to the U.S. government, which is using it to fund other government programs, such as the war in Iraq. In exchange, Social Security receives interest-bearing Treasury securities. The value of those bonds is now about $1.5 trillion.
Why does the president believe the system needs to be changed?
Soon, the baby-boom generation will begin retiring, reducing the number of workers per retiree. Meanwhile, people are living longer and thus would collect benefits longer, while parents are not having as many children, which limits the pool of new workers. Under current projections, this means that toward the end of the next decade, payroll collections will not cover anticipated benefits, and Social Security would begin tapping its trust funds.
Why does it seem I put a lot of money into Social Security but won't get a lot back?
You are paying not only for retirement benefits but also disability and life insurance. Moreover, wealthier people are helping subsidize poorer workers. We also are paying for the fact that as the system was set up and expanded, earlier generations of retirees got much more in benefits than they contributed in payroll taxes. The rate of return earned by Treasury bonds in the trust funds is about 3 percent a year. But to talk about the rate of return for individual workers is misleading because Social Security, as originally envisioned, was never intended to generate wealth but to supply an income floor.
So how would Bush's plan be different?
Bush's plan also seeks to maintain an income floor, but at the same time give workers choices that might generate wealth. In 2011, when the plan would take full effect, workers who were born after 1949 would have the option of annually investing as much as 4 percent of their wages, to a maximum of $1,000, in an individual account. The other 8 percent of their wages would be invested in the current system. Workers 55 years and older would remain in the current system. (Under the gradual phase-in, workers born between 1950 and 1965 can participate in 2009, and those born before 1979 can participate in 2010.) Over time, the amount that could be invested in the accounts would grow slowly, by a little more than $100 a year.
Can I use the money for any kind of investments?
No. Under the plan, you would choose from a small number of diversified funds, all relatively conservative. They would be administered by the government and modeled after the Thrift Savings Plan now available to federal workers. The standard option would be a "life cycle" fund, which reduces the percentage invested in stocks as someone gets closer to retirement.
Can I borrow the money invested in the accounts?