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Personal Finance > Retirement

Social Security: Unanswered questions
President Bush tells reporters he will negotiate with Congress about specific reform measures.
December 20, 2004: 1:55 PM EST
by Jeanne Sahadi, CNN/Money senior writer

NEW YORK (CNN/Money) President Bush said Monday he won't specify what tough choices he would support to ensure the long-term solvency of Social Security.

He reiterated at his year-end press conference that he was not in favor of raising the payroll tax and that any changes made would not affect those in or near retirement.

But still unclear is what age he would define someone as a "near retiree" and whether he would support raising the level of income subject to the payroll tax.

"I'll propose a solution at the appropriate time. But the laws will be written in the halls of Congress. I'll negotiate with them," the president said.

That was part of his response to a reporter's question about what measures may have to be taken to preserve the solvency of Social Security, which is expected to take in less money than it pays out starting in 2018, requiring the government to start tapping the surplus Social Security has built up to pay all benefits as promised thereafter.

Beginning in 2042, according to estimates by Social Security's trustees, or 2052, according to projections by the Congressional Budget Office, the system will only be able to pay out between 75 percent and 80 percent of promised benefits, unless changes are made.

Among the many solutions that have been discussed are raising the retirement age or cutting benefits.

The president noted again he is not in favor of increasing the payroll tax. "Payroll tax ... will not go up," he said.

Currently 12.4 percent of workers' earned income is paid into the system, half of it paid by the employee and half by the employer.

It's not clear, however, if the president was also referring to the amount of income subject to the payroll tax. In 2005, it's the first $90,000 of earned income. Were that cap to be lifted, higher income taxpayers would have to pay more into the system.

President Bush also said that whatever solutions are adopted, "nothing will change for those near or on Social Security." But he did not specify which age will define a "near retiree."

The president has said all along he favors partial privatization of Social Security, allowing younger workers to divert part of their payroll tax into personal investment accounts. "(Social Security) is now in a precarious position. And the question is whether or not our society has got the will necessary to adjust from a defined benefit plan to a defined contribution plan," he said.

The hope is that younger workers will earn a higher rate of return on that diverted money than they might if it were paid directly into Social Security. "The rate of return would enable that person to have an account that would make up for the deficiencies in the current system," he said.

But critics have argued that the risks inherent in the stock and bond markets coupled with higher administrative costs might negate those potentially higher returns.

And supporters and critics of privatization acknowledge that the creation of those accounts will not address Social Security's solvency issue.

Rather, it would create a near-term shortfall in Social Security revenue estimated between $1 trillion to $2 trillion.  Top of page

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