NEW YORK (CNN/Money) -
President Bush plans to make Social Security reform one of the top priorities in his second term.
The president says his Cabinet will immediately begin efforts to reform America's ailing system, but he said making changes to the retirement program would be particularly challenging.
"I will meet with both Republican and Democratic leaders," Bush said in his first news conference after the bitterly contested presidential election. "We will start bringing together those in Congress who agree with my assessment that we need to work together."
(For more on what Bush mentioned regarding the economy in his Thursday news conference, click here).
The future of Social Security -- and the financial strains it faces when 77 million baby boomers begin to retire -- was an issue in this year's presidential elections.
During the final few months of a vigorous campaign for the presidency, Sen. John Kerry had suggested that the president was planning a "January surprise" -- the swift privatization of Social Security.
Kerry said the move would be "a disaster for America's middle class." But the Bush administration disputed the report and denied having used the word "privatize."
The Bush team may not have said the word, but as part of his long-standing pitch for an "ownership society," the president has proposed the creation of personal retirement accounts. They would give workers some control over how to invest their payroll taxes, including the possibility of investing in stocks.
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Those who choose to create such private accounts would receive smaller Social Security checks in their golden years. But proponents argue that workers would come out ahead, thanks to the potential for higher returns.
Opponents to private accounts say that exposing Social Security funds to market risks could decimate needed retirement money. They argue that recent corporate and Wall Street scandals underscore the inherent risks of any free market-based investment plan.
But what would such a system look like?
Three proposals
The White House hasn't been specific, but in May 2001 Bush established the President's Commission to Strengthen Social Security, a 16-member panel.
The commission delivered three proposals, all involving personal investment accounts and all allowing the accrued savings to be bequeathed to heirs.
Investors would likely be able to choose from a handful of stock and bond index funds, or more conservative options, for their personal accounts.
Click here for the Ultimate Retirement Guide
"You wouldn't be able to buy a single company stock," says Olivia S. Mitchell, a professor of insurance and risk management at The Wharton School who served on the commission. "It was not a vehicle intended for day-trading or anything like that."
In the simplest reform plan, workers would be allowed to invest 2 percent of their taxable wages in personal accounts. This plan would leave the rest of the system essentially unchanged.
The second option would let workers put 4 percent of their wages, up to $1,000 a year, into a personal account. The rest of their payroll taxes would be deposited into the existing Social Security fund, which holds special government bonds. This plan would also keep down costs by adjusting Social Security benefits to keep pace with price inflation instead of wages, which have risen more rapidly over time.
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A third proposal was similar to the second but required workers to deposit 1 percent of their earnings into retirement accounts before they could invest an additional 2.5 percent of their payroll taxes.
Bush has yet to spell out which option he favors, but the second model has gotten the most attention.
"When the commission returned its report, most people focused on the second one, because it's the most coherent," said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates fiscally responsible policies.
Another hint that Bush might lean toward that second model? The White House's Council of Economic Advisers referenced the plan in a section on Social Security reform in its 2004 "Economic Report of the President."
No matter what plan he chooses, any privatization would also come with so-called transition costs, the initial increase in the gap between worker contributions and retiree benefits that would result as workers send part of their payroll taxes into private accounts.
Estimates of the gap vary -- it's the "$2 trillion hole" that Kerry refers to in his speeches -- but there's no question that money would have to be moved into the government system to make up for the money moved into private accounts.
The bottom line? In the end, whether it's now or later, a generation of Americans has to pay.
-- Yuval Rosenberg contributed to the story
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