State of the Union: Bush proposes social security overhaul

US President George W. Bush begins his State of the Union address as Vice President Dick Cheney applauds. Picture / Reuters

WASHINGTON - United States president George W Bush proposed the biggest overhaul of social security since its 1935 creation in his State of the Union speech, and for the first time said he would consider limiting future retirement benefits as part of a solution.

"Social Security on its current path is headed toward bankruptcy. And so we must join together to find the most effective combination of reforms," he said.

In a speech laying out a second-term blueprint, Bush also promised that following Iraq's watershed elections last Sunday the United States would begin a "new phase" and increasingly focus on training Iraqi forces to allow for an eventual US pullout. He rejected appeals from some Democrats for setting a withdrawal timetable.

"We will not set an artificial timetable for leaving Iraq, because that would embolden the terrorists and make them believe they can wait us out," he said.

Bush reflected a growing optimism over a possible end to the Middle East conflict, saying the goal of Palestinian statehood "is within reach" and promising more aid for the Palestinians.

Facing significant opposition to his goal of revamping Social Security this year, Bush said the system is "headed toward bankruptcy" and he wanted to work with both parties in Congress to "find the most effective combination of reforms".

"Fixing Social Security permanently will require an open, candid review of the options," he said.

He proceeded to lay out some options: Limiting benefits for wealthy retirees, indexing benefits to prices rather than wages, which would effectively slow their growth; increasing the retirement age, and discouraging early collection of benefits.

"All these ideas are on the table," Bush said. "I know that none of these reforms would be easy. But we have to move ahead with courage and honesty, because our children's retirement security is more important than partisan politics."

Those ideas have been talked about by politicians for years to control the program's fast rising costs -- with 2018 looming as the year when the system begins deficit spending. But the options have not gained ground due to political opposition.

Bush said any permanent solution must include his plan for private retirement accounts, a programme Democrats bitterly oppose. He ruled out raising the payroll tax, the source of Social Security funds.

To try to placate those worried about private accounts, he would leave current benefits alone for Americans 55 or older.

The new accounts would be phased in gradually. Younger workers would be able to set aside 4 per cent of their payroll taxes into their accounts, capped at US$1000 ($1400) per year in 2009. The cap would rise gradually over time, growing US$100 per year.

The accounts would be modelled after Thrift Savings Plans for federal government employees and would offer only a few, regulated investment options to minimise the investment risk.

Various independent estimates have put the transition cost of moving to private accounts at US$1 trillion to US$2 trillion over 10 years.

The White House estimated the Bush plan would cost less than those predictions, US$664 billion through 2015, money that would be borrowed. To service that debt would cost another US$90 billion.

Announcement of his plan set the stage for a pitched battle this year over the direction of Social Security, which experts say will begin paying out more in benefits than it collects in contributions starting in 2018.

Democrats are vowing a fight and the AARP, a powerful lobby group that represents 35 million senior citizens, said it would oppose any plan that takes money out of the current Social Security system.

Senate Democratic leader Harry Reid of Nevada says he has an agreement from 44 Democrats in the 100-member senate to oppose private accounts, a serious obstacle to the president unless he is able to pick some off with inducements.

"We will be first in line to work with him," Reid said. "But when he gets off track, we will be there to hold him accountable. And that's why we so strongly disagree with the president's plan to privatise social security."

In a bid to create a favourable environment for Middle East peace negotiations -- secretary of state Condoleezza Rice is heading to the region this week -- Bush proposed a US$350 million aid package for the Palestinians to bolster economic development and security.

Across the Middle East, Bush said the United States expected a "higher standard of freedom" and specifically mentioned the need for two key US allies, Saudi Arabia and Egypt, to embrace democratic reforms.

- REUTERS