Brickbats blur Bush proposal for Social Security

President Bush’s Social Security reform proposal to let workers invest some of their payroll taxes in stocks and bonds would dramatically change the way millions of Americans prepare for their retirement, but the complex details of how his sweeping plan would work have been obscured by the furious political battle it has ignited.

Mr. Bush’s personal retirement account (PRA) plan has been attacked by the AARP as a high-risk gamble, which the politically powerful retiree lobby compares to playing the slot machines, even though one of the few investment choices the plan would allow is what Social Security invests in now — U.S. Treasury bonds.

Democrats in Congress have charged that the proposal would result in retirement benefit cuts of more than 40 percent and say that the system “is just fine” for the next 50 years, while the program’s trustees say it is headed for bankruptcy if nothing is done to change it.

“This willful misunderstanding of the operation of personal accounts is dishonest and obscures the truth,” Heritage Foundation analysts David C. John and Keith Miller said in a memo released after Mr. Bush’s State of the Union address.

“While inaction will lead to automatic cuts in Social Security benefits, personal accounts could allow Social Security to pay what it has promised,” they said.

Doing nothing, most independent analysts think, is far riskier to the solvency of the Social Security system and its beneficiaries. Without any changes to its financial structure, government trustees say it will need an infusion of $27 trillion through 2079 to finance future benefits for millions of additional retirees.

Here’s how the program would work:

Workers younger than 55 would be allowed to voluntarily invest up to 4 percent of their income in a small number of government-approved stocks and bonds, or a mixture of the two to minimize risk. It would be modeled after the government’s Thrift Savings Plan, which allows federal employees to invest in a choice of five stock and bond funds to supplement their federal pensions.

Despite charges by critics that the accounts would mean cuts in benefits, retirees and those who are 55 or older would not be affected by Mr. Bush’s plan. They would receive their full benefits under the existing system.

Younger workers who want a PRA would be gradually phased into the program over three years, according to their age, with the oldest going first.

“The first year that we envision that people would have a complete investment control of their personal accounts would be 2009,” said a senior administration official who briefed reporters on the president’s plan last week.

Annual contributions to the retirement accounts eventually would rise to 4 percent of wages, but would be capped at $1,000 in the first year, rising by $100 a year until they reach the maximum. This means, for example, that the yearly investment of someone earning $25,000 would be capped at $1,000; a person earning $75,000 annually would be able to invest $3,000 under the plan.

Anyone who chooses to remain within the present Social Security program would be allowed to do so.

The investment program would be administered by a federal agency, probably the Social Security Administration, but the funds themselves would be managed by professional mutual managers that handle IRAs and employee 401(k) investments.

The Bush administration estimates that the funds would have a very low administrative cost of about 0.3 percent of each account’s balance, most of which would go to the federal agency handling the accounts, not to the fund managers.

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