Bush tries to convince skeptical Americans

President Bush, as expected talked about Social Security reform (as he likes to call it) in his State of the Union address to Congress. While he used the words "...on its current path, (Social Security) is headed toward bankruptcy," most analysts say that that is not the right way to describe it. Like many other parts of the US economy (huge budget and trade deficits, falling dollar, offshoring of jobs, relatively high unemployment rate, etc.), Social Security also needs to be redesigned over time, but use of terms like "crisis" and "bankruptcy" remind Americans of imaginary weapons of mass destruction. Only 14% of Americans believe the President on Social Security, according to a Zogby poll, sponsored by the conservative think tank Cato Institute. (Related article: Bush uses same strategy to market Social Security privatization that he used for selling Iraq war to Americans).

President Bush did not have anything more convincing to say about why Americans should support privatization of Social Security since creation of personal retirement Social Security accounts is not designed to shore up Social Security's finances. These accounts neither add money to the system nor change benefits. The shortfall in Social Security will be made up by cutting benefits for baby boomers and younger Americans.

Here are the major changes that the President is proposing:

1. Younger Americans can divert about two-thirds of their Social Security taxes into new personal-investment accounts. The plan would allow them to divert 4% of their salary - or about two-thirds of the 6.2% tax they now pay on wages up to $90,000. The account would be capped at $1,000 initially and would rise over time.
2. Retirement benefits will be indexed to inflation rather than wages. This will lower the retirement benefits. The President is hoping that investment in the stock market will create wealth and make up the difference so that retirees will not fall into poverty. Many critics, however, suspect that many more retirees, women, and children will fall into poverty.
3. Americans born in 1949 or before will be protected from any of these changes after strong opposition from AARP to privatizing Social Security.
4. The diverted Social Security taxes would be invested in private accounts in which pension-fund managers would invest them in a mix of stocks, corporate bonds and government bonds. The program will share some of the features of the federal employees' Thrift Savings Plan, a pension program with low administrative costs, which offers only a handful of investment fund options, with varying degrees of risks.

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