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Q&A on Bush's Social Security plan

WASHINGTON—President Bush made clear in his State of the Union address Wednesday night that overhauling Social Security is his top domestic priority for his second term. A lot of confusion surrounds his proposals, which are complicated. Many details remain to be filled in by Congress. Yet enough is known to answer some frequently asked questions.

Q: Is Social Security really in trouble? Why?

A: Yes. Because its costs are rising and its income will not keep pace. Americans are living longer. The baby boom generation starts to retire in 2008. Fifty years ago there were 16 workers paying wage taxes into Social Security for every retiree drawing retirement benefits. Today there are only three workers; by 2050, there will be only two.

Q: Will Social Security be exhausted and go bankrupt then, as the president said?

A: No. That's an exaggeration. Social Security's trustees project that the system can pay full retirement benefits until 2042 without making any changes. The nonpartisan Congressional Budget Office says the system will be able to pay full benefits until 2052 without any change.

Even by those dates, annual revenue into the system will cover 73 percent of annual retirement-benefit costs indefinitely. No authoritative financial analyst foresees total financial collapse for Social Security.

Q: Does that mean there's no problem until 2052?

A: No. Social Security actuaries project that in 2018 the system's annual revenues will begin falling short of annual retirement-benefit costs. By 2027 the annual shortfall will be about $200 billion, rising over time. The system will cash out Treasury bonds in its trust fund to cover those costs. The cash will come either from income-tax revenues that otherwise would pay for other government programs, such as defense or national parks, or—more likely—from the Treasury selling more bonds. That would add to the national debt.

Q: How would President Bush's proposal for new accounts help?

A: Bush's proposal to create personal investment accounts would do nothing to bring Social Security closer to fiscal solvency. Senior administration officials admitted that Wednesday at the White House.

Q: How would the accounts work?

A: Bush proposes to let Americans born after 1949 divert 4 percent of their wages into new personal investment accounts. Each account would be capped at $1,000 initially, but the cap would rise over time. The accounts would start in 2009, and participation would be voluntary. Participants could choose among a handful of conservative stock and bond funds. The government would contract with a private fund manager to manage the funds. People couldn't tap the accounts before retirement or borrow against them. Account balances would be converted into annuities upon retirement.

Q: Would participants still get traditional guaranteed Social Security benefits?

A: Much reduced ones. People who open the new accounts would lose the guaranteed benefits roughly dollar-for-dollar for the money they divert from their wage tax into the new account. In exchange for losing the guaranteed benefits, you gain the chance to invest in assets that may earn more. Of course, they may earn less too, if your investments don't work out.

Q: How much would this cost taxpayers?

A: The Bush administration estimates it will cost $754 billion through 2015, but that's a period when it's phased in and includes only five years at full operation. Social Security actuaries estimated that such a plan would cost $2.2 trillion in the first decade of full operation and $4.5 trillion in the second. That would be added to the national debt.

Q: Why are Democrats so opposed to Bush's plan?

A: They say it removes a guaranteed retirement asset and replaces it with market risk. They think it would result in widely varying individual outcomes, depending upon what investments people chose and how market valuations vary when people retire. They fear these new accounts are the start of a drive to replace Social Security entirely. They think Social Security could be made solvent by rolling back some of Bush's tax cuts or by modest, phased-in reductions in future benefits. They say that adding so much to the national debt is irresponsible.

Q: If the private accounts wouldn't bring fiscal solvency to Social Security, why would President Bush propose them?

A: Republicans trust financial markets more than government. They believe private accounts will earn most people more money over time than they would receive under the existing system. They think people will become more self-reliant if they manage their own retirement plans. They think that will make them more responsible citizens—and more inclined to vote Republican.

Q: Is this likely to happen or not?

A: Bush faces an uphill fight. Republicans control Congress, but many of them are nervous that voters will reject this plan. Bush's best chance is in the House of Representatives, where Republican leaders back the plan and impose strict discipline on members. The Senate will be much harder. Democrats say they'll exploit every Senate rule to block Bush's plan, and they are a big enough minority bloc to do that. In addition, several leading Senate Republicans have voiced strong reservations. However, Bush has proved to be a strong leader who usually gets his way when he's determined.

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(c) 2005, Knight Ridder/Tribune Information Services.

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