updated 12/2/2004 2:36:24 PM ET 2004-12-02T19:36:24

At the top of President Bush’s legislative agenda for next year is an overhaul of Social Security. He wants to let younger workers divert some of their Social Security payroll taxes into personal investment accounts similar to a 401(k).

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It would be a voluntary system, which Bush says would help shore up the program’s finances. The president has not provided details about how private accounts would be structured or financed, although he made the overhaul a campaign promise in 2000.

Here, in question and answer form, is a look at the issue:

Q: Why are changes needed to Social Security?

A: Social Security is a pay-as-you-go system, with current benefits funded by the 12.4 percent in payroll taxes paid by workers and employers. The large baby boom generation will strain the system, which will start paying out more in benefits than it collects in taxes in 2018, according to the Social Security Board of Trustees. Without any changes, Social Security in 2042 will be able to cover only about 73 percent of benefits owed.

Q: Will creating personal investment accounts fix the funding problem?

A: No. Other changes will be needed, such as raising taxes, raising the retirement age, cutting benefits or a combination. The retirement age now is 65 and four months, and is rising two months each year until it reaches 67.

For example, many proposals to add private accounts reduce promised benefits by changing the way base retirement benefits are calculated. Investments are supposed to make up the difference.

To help finance the change, some lawmakers say they will consider raising or removing the limit on income subject to the payroll tax. The maximum level of earnings taxed is $87,900 now; it will rise to $90,000 next year.

Q: Will raising taxes, raising the retirement age or cutting benefits shore up funding without adding investment accounts?

A: Yes.

Q: Then why create investment accounts?

A: It’s a philosophical debate. Supporters, generally Republicans, see an opportunity to create what they view as a better system that does not rely on demographics. They say that payroll taxes are people’s money and that Social Security does not provide people with much of an investment return. Supporters think workers should be able to pass on some of their retirement account to survivors. Younger people tend to be more supportive of this idea.

Q: How do opponents of the accounts idea view Social Security?

A: Opponents, who tend to be Democrats, say Social Security is an insurance program, not a wealth-generating program, that provides a guaranteed, risk-free benefit. It was created during the Great Depression to help keep elderly people out of poverty, with a generation of workers paying for retirees’ benefits. Opponents also say the investment accounts can be risky.

AARP, a powerful lobbying group representing older people, opposes the investment accounts if payroll taxes are diverted into them.

Q: What about money in the Social Security trust fund?

A: The trust fund does not really contain money. Social Security today collects more in taxes than it pays out in benefits. The extra money is used to buy Treasury bonds from the government. The government then spends the money as part of its general revenue.

Starting in 2018, when payroll taxes will not completely cover promised benefits, the bonds will be cashed in, with the government essentially repaying the money it already had spent. That will provide revenue to pay benefits to 2042.

Q: How would the investment accounts generally work?

A: Younger workers could put a portion of their payroll taxes in a special account. Like they able to do under a 401(k) plan, workers could choose from several investment options, such as a mix of stocks and bonds. Retirees and those nearing retirement would not participate.

Q: Then how would their benefits be funded if payroll taxes are getting diverted into accounts?

A: That is a problem. Such transition costs are expected to be around $2 trillion, depending on the size of the accounts. Supporters say money could be borrowed. Some are open to raising or removing the limit on income subject to the payroll tax. Opponents point to record budget deficits — $413 billion in 2004 — and are against borrowing. Some opponents think Bush should be willing to roll back some of his recent tax cuts to provide funds.

Q: Stock market investments are risky. How will risk be limited for people who will rely on the accounts for retirement?

A: Supporters say investment options will be conservative and limited. Some proposals require the government to guarantee a minimum level of benefits.

Q: Social Security is not only a retirement program. It also provides disability and survivors’ benefits. How will those programs be affected by an overhaul to investment accounts?

A: That is not clear. Some proposals keep those programs separate and unchanged. Others don’t address the issue.

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