President Bush on Wednesday rolled out the centerpiece of his plan to overhaul the financially troubled Social Security system -- an enticing vision of young workers building retirement nest eggs in their own personal accounts.
But senior White House officials acknowledged that private accounts would do nothing to keep the giant retirement system solvent.
Indeed, some independent analysts said the private accounts would make the problems much worse by siphoning tax revenue away from the system and adding hundreds of billions of dollars in transition costs.
When it came to addressing the funding problem, Bush ticked off several possibilities. He attributed each one to a Democrat and embraced none, but he said all such ideas were on the table. All involve substantial cuts in Social Security benefits.
In showcasing private accounts, the White House seemed to be pursuing a political strategy: hoping to build enthusiasm for private accounts before bringing up benefit cuts.
“The administration is working on the theory that [members of Congress] need to see the dessert on the table before they’ll eat the green beans,” said David C. John, a research fellow with the conservative Heritage Foundation and longtime advocate of private accounts.
The basic funding problem stems from the fact that the Social Security system will have to pay out more and more in benefits as baby boomers retire, while the number of workers paying into the system per retiree would shrink. Social Security trustees peg the long-term shortfall at $3.7 trillion over the next 75 years.
In touting private accounts, which would be invested in stocks and bonds, Bush said they would deliver higher returns than Social Security and provide the added comfort that “the money in the account is yours and the government can never take it away.”
Yet senior administration officials, speaking before the speech had been delivered, said those accounts would come with substantial strings attached.
These officials said that working Americans under age 55 could eventually divert almost one-third of the 12.4% in payroll taxes that they and their employers now pay to Social Security into personal investment accounts. For a worker with annual earnings of $35,000, that would amount to about $1,400 a year.
Workers 55 and over would see no change in their benefits and would not be allowed to enter into the new system of private accounts.
Bush described the private accounts as personal nest eggs that could even be passed on to children or grandchildren.
Officials, describing how the private accounts would work, outlined significant restrictions on individuals’ decision-making power to reduce the chance of loss. Individuals would have to choose from half a dozen mutual fund-like investment portfolios that would be overseen by the government. And they would have to accept substantial benefit cuts from the traditional system in exchange for setting up the private accounts.
As a worker approached retirement, his or her savings would be automatically switched into increasingly conservative investments -- unless the worker and his or her spouse signed documents saying they understood the risk they were taking in not making the switch.
When a worker did retire, he or she would have to spend at least part of the money on an insurance policy that would guarantee he or she remained above the poverty line and, therefore, would not have to turn back to the government for benefits.
“Each one of these restrictions reduces the freedom of ownership,” said Robert D. Reischauer, president of the Urban Institute, a centrist Washington think tank. “This isn’t open-range ownership anymore. It’s become very, very restrictive.”
Key members of Congress, including Sen. Lindsey Graham (R-S.C.), and many top policy analysts have said for some time that private accounts would not improve the retirement system’s financial condition -- and could make it worse.
Bush and his aides have until now studiously avoided discussing the issue.
But asked Wednesday whether it would fair to describe the proposed accounts as having “no effect whatsoever on the solvency” of Social Security, a senior administration official said, “That’s a fair inference.”
The uphill battle that Bush faces was illustrated by reaction to his Social Security remarks by some in his own party, as well as by political analysts.
Sen. Chuck E. Grassley, the Iowa Republican who chairs the Senate Finance Committee, which must approve any Social Security overhaul, said, “I give the president credit for taking on a controversial issue.” But Grassley made no mention of private accounts and moved quickly to an issue that the White House has tabled for the moment: tax simplification.
Independent political analyst Stuart Rothenberg said that the administration’s admission that there was no connection between private accounts and Social Security’s long-term solvency could complicate Bush’s planned two-day, five-state campaign swing later this week to tout his proposals.
“This is bad news for the White House,” Rothenberg said. “If Democrats can successfully argue that personal accounts won’t solve the problem, they not only erase the [Bush] message, but they also cast doubt on the crisis message.”
Aides said that the administration was modeling its proposal on the federal thrift savings plan, which provides government employees with a sort of bare-bones family of mutual funds. Employees can direct part of their paychecks into one or several of five investment funds.
The funds invest in various mixes of stocks and bonds. They run the gambit from the near-riskless “G Fund,” where the money goes only into U.S. Treasury bonds, to the riskier “I Fund,” where the money goes into foreign stocks.
The officials said that the new private account system would include a “lifecycle fund” that would make riskier investments during the early years of a worker’s career, but increasingly more conservative investments as the worker approached retirement. Officials said this fund would be the default fund for older workers who did not choose to invest their money in other funds.
One official said that older workers would be permitted to invest in riskier funds but that “they would have to sign some forms and get the sign-off of their spouse, if any, to show that they’re aware of the implications of having a different investment mix that close to retirement.”
Under the president’s proposal, workers signing up to divert money that now goes to Social Security into private accounts would have to agree to forgo a portion of the benefits they are now promised under the public retirement system. Officials said that workers would have to earn an after-inflation 3% annual return on their private account to make up for the loss of traditional benefits.
Bush cited several possible approaches to ensuring Social Security’s long-term fiscal solvency by reducing the future benefits.
“All these ideas are on the table,” Bush said. “I know that none of these reforms would be easy.”
“I will listen to anyone who has a good idea to offer.”
Times staff writer Joel Havemann contributed to this report.