How would President Bush’s Social Security proposals affect you?

Too soon to tell. Although the president has been talking about the issue for five years and appointed a commission that made proposals in 2001, his detailed plan is still some weeks or months off.

But in his State of the Union address and the subsequent campaign swing to drum up support for changes to Social Security, he did reveal a bit more.

It’s clearer now, for example, that there are two types of benefit cuts on the table.

First, there are cuts that could be imposed on all Social Security beneficiaries as the government tries to close the gap between payroll taxes received from workers and payments made to retirees. The president listed several options that I’ll get to in a moment.

Second, is the additional cut in traditional “guaranteed” benefits for people who would participate in the voluntary private investment accounts Bush has proposed.

How private accounts work

At a recent press conference, an administration official described private accounts as, in effect, a kind of loan from the government to individuals. Participants would have to pay it back — with interest.

It would work like this: In the first year, you could invest up to $1,000 in any of a handful of stock and bond mutual funds approved by the government. The $1,000 would come from the Social Security tax that already is deducted from your paycheck. Now, most of that money is used to pay current retirees’ benefits. The surplus goes into a trust for future benefits.

Under Bush’s proposal, you could retire in, say, 20 years with a nest egg built up in your personal investment account. In addition, you’d start getting a guaranteed monthly Social Security benefit, just as you would if private accounts weren’t offered or you chose not to have one.

But if you did have a private account, that Social Security check would be smaller than it would be if you didn’t have it.

The size of that reduction would be based on the amount you’d invested in the private account and the interest charges that had built up over the years you had that “loan.” For the private account to make sense, the investments in it would have to grow enough to offset the cut in the regular benefit.

To do this, your private account would have to earn 3 percent a year above the inflation rate, the administration official said.

Thus, if inflation averaged 3 percent a year, you’d have to earn 6 percent or more each year in your private-account investments for that option to pay. Earn more than that and you’d come out ahead; earn less and you’d end up behind.

Keep this in mind: Even if you choose not to have a private account, the ordinary benefit would likely be smaller than what you’re promised by today’s system because of changes that probably will be made to close the projected funding gap.

How much smaller?

Again, the president hasn’t said.

The administration has argued that the benefit promises made by today’s system are empty because there won’t be enough money to meet them. While critics argue the gap could be made up by raising payroll taxes or allowing the government itself to invest some of Social Security’s current surplus in stocks, the president rules those out. That makes some kind of benefit cut all but inevitable.

President’s other options

He has listed some alternatives without advocating any, including limiting benefits to wealthy retirees or changing the way an individual’s benefits are calculated.

One approach would be to raise the retirement age — the age at which recipients can get full benefits. Currently this is 65, but it’s already set to rise gradually to 67.

Raising the retirement age further would be a benefit cut because people would get payments for fewer years.

Another approach would change the way the government figures a retiree’s initial benefits. Currently, the starting level is raised each year to match the average rise in wages, so that the average recipient starts with a benefit equal to about 40 percent of his or her income just before retirement.

One option the president mentioned would base this annual adjustment on the consumer price index instead of wages. This would save the government money because prices rise more slowly than wages.

Imagine, for example, that your monthly benefit, if you retired today, would be enough to pay rent on a one-bedroom apartment. All else being equal, if you retired 10 years from now, the starting benefit, indexed to wage gains, might be enough to pay the rent and also buy a couple of weeks’ groceries.

Were starting benefits indexed instead to prices, that first check 10 years from now would be just enough to pay the rent. There would never be a gain in buying power.

People who oppose price-based indexing say over time it would reduce the average starting benefit to 20 or 30 percent of a recipient’s preretirement income, compared to today’s 40 percent.

Today’s wage-based system is meant to ensure that new retirees’ benefits keep pace with improvements in Americans’ standard of living.

Whether that’s a goal worth preserving is, in part, a philosophical question.

It’s one of many we will be wrestling with when the president gives us more details of his Social Security plan.