Although Social Security is financially sound and will pay full benefits without failure through 2042 (and at 75 percent of promised benefits thereafter), the president has proposed radically changing the way America provides for retirement security for the elderly.  While he has not presented specific legislation to the United States Congress, or even an outline on how he wants to reform Social Security, he has indicated that his priority is to create a system of private stock and bond market accounts that are funded by payroll taxes that are currently used to pay Social Security benefits for the retired, disabled, orphans and widows.

In 2001, a Commission appointed by the president, put forth a plan that the president has since referred to as a “good blueprint for reform.”  This plan, as applied by the president, would have three basic components:

• Reduction in traditional Social Security benefits for everyone in the system by as much as 40 percent;
• Diversion of Social Security revenue into private accounts invested in stocks and bonds; and
• Transfer of as much as $5 trillion from the rest of the federal budget to Social Security to offset the adverse effects of private accounts on the Social Security Trust Fund.

Click here for a PDF containing a thorough analysis of this plan, often called "Model 2." 

Based on what the president has discussed in his State of the Union address and in subsequent appearances, this is what a privatized Social Security system would entail:

• The estimated cost to the public for privatization would be $4.9 trillion over the first 20 years. The transition would be financed through public borrowing from lenders, both foreign and domestic.

• The plan would allow individuals to make a one-time election to open a private account, but does not specify at what age a person must make a decision. Participants in the private accounts would be forbidden from going back into Social Security’s guaranteed benefit plan.

• Private accounts would be invested in a government-run securities fund or an index fund. Investments could be diversified in five funds based on the Thrift Savings Plan – a retirement plan similar to a 401(k) that is currently available to federal government employees.  Like other employer-based retirement plans, the Thrift Saving Plan is a program that allows saving in addition to Social Security – government employees cannot choose one or the other. There will be one annual period for plan adjustments.

• Guaranteed benefits will be cut for those who stay in the traditional system.  Unlike Social Security beneficiaries, participants in the private investment accounts would not have their paycheck amounts protected against inflation.

• Upon retirement, private account holders would be required to purchase an annuity that provides a monthly payment up to the poverty rate, about $18,000 presently.  If the account holder dies before the annuity is paid out, his or her heirs would not receive the account balance.  There would be no defined protection for annuity holders if the issuing company goes under.  Account holders could choose to leave the money in their account to pass on to their heirs.

• The private fund would be locked until retirement.  Unlike other private retirement savings plans, withdrawals in lump sums or for purchase of items such as a house or educational costs are not permitted.

• There is a “Privatization Tax.”  Under the president’s plan, private account holders would place four percent of their income in their accounts and eight percent in the Social Security fund.  The only money a private account holder would keep is the interest earned on their private account that is greater than three percent.  If a private account performs poorly with returns less than three percent, the guaranteed monthly benefit could be reduced from what it would be under Social Security by as much as 100 percent.