Social Security Plan Cutoff to Be 55

Social Security (search) benefits will not change for retirees or wage-earners age 55 and older in the plan President Bush unveiled Wednesday night. But the government guarantee would drop for younger workers whether or not they set up personal accounts.

Eventually, Bush envisions permitting younger workers to invest two-thirds of their payroll taxes in the new personal accounts. They would be required to purchase an investment guaranteed to 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 (search). They omitted other material — declining to say, for example, how large a drop in guaranteed benefits would fall on younger workers. Some estimates put it in range of 40 percent, although Republican aides stressed that any reduction would 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 some GOP leaders that he give them leeway to fashion a measure that can pass.

"Fixing Social Security permanently will require an open, candid review of the options," the president told lawmakers. "I will work with members of Congress to find the most effective combination of reforms."

The president outlined several options that he said had been proposed by others and were "on the table." They included lowering benefits for the wealthy; increasing the retirement age; and changing the way benefits are calculated.

He omitted others — raising the payroll tax, for example, and adjusting benefits for gender or race.

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

"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 of 40 percent or more," said Senate Minority Leader Harry Reid (search), D-Nev.

Administration officials said that under Bush's blueprint, the reduction in the federal benefit for Americans younger than 55 would be larger for those who establish personal accounts than for people who do not. The assumption is that investment income would more than make up the difference.

Administration officials acknowledged that the personal 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 in 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 promised amount.

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 cut-off for near retirees 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.

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 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.

Aides said that would mean only a limited profit potential for Wall Street.

As their work years end, all workers with personal accounts would be required to purchase investment annuities that would combine with their monthly government check to assure income above the federal poverty level during retirement. The downside: Any money put into an annuity can't be passed onto heirs — and polling shows that inheritability is one of the most persuasive arguments on behalf of personal accounts.

Those who choose to participate in the new plans would have a limited set of investment choices, similar to those available in many company-sponsored 401(k) plans and the Thrift Savings Plan retirement system for federal workers.