Tinkering with America's retirement income

President Bush is traveling the country, pushing his plan to add personal accounts to Social Security. But how would those accounts really work?

To some extent, much like the 401(k) investments that many workers have. But Bush leaves out many details, including important questions about how far benefits would have to be cut to secure the program's long-term finances.

More comprehensive plans developed by members of Congress and by a commission Bush appointed give more details, offering a vision as to what a full program might look like.

Some questions and answers:

Who is eligible to open the accounts?

Under the Bush plan, anyone under age 55 would be eligible. Those age 55 and up would stay in the existing program and get benefits promised under current law.

Will the accounts solve Social Security's financial problems?

No. The personal accounts do almost nothing to solve the basic problem Social Security faces: It will soon be paying more in annual benefits than it collects annually in payroll taxes. Benefit cuts or tax increases will be needed to make the system solvent long-term.

Who would be affected by benefit cuts?

All those under 55 -- whether or not they take personal accounts. Supporters hope that profits from the private accounts will partly make up the difference.

How would the accounts work, and how would they differ from today's system?

Social Security today is a pay-as-you-go system, where workers and their employers each pay 6.2 percent of an employee's wages (up to $90,000 a year) into the Social Security trust fund. The taxes pays for benefits to current retirees. Future retirees' benefits are expected to be paid for with taxes collected then.

Under the Bush plan, workers could divert two-thirds of their Social Security taxes into private accounts that could be invested in stocks and bonds to help fund their own retirement. Contributions would initially be capped at $1,000 per year but the cap would rise by $100 a year. The rest of Social Security taxes would continue to pay for traditional benefit checks. When it came time to retire, one's retirement income would come from a combination of the new personal accounts and traditional Social Security benefits.

Workers also could forgo the private accounts and keep all their taxes in the traditional system, and therefore their government check would be larger.

What would happen to the money in your personal account when you retired?

Under the Bush plan, you would keep that money, though low-income seniors would be required to use at least some of it to purchase an annuity that guaranteed poverty-level monthly benefits until death.

What about the traditional benefit?

Those who don't open private accounts are likely to also see their benefits reduced from what's now promised. That's because all benefits are likely to be reduced to put the system on sound financial footing.

For those who choose to set up a private account, there would be a further reduction. That reflects the fact that people with accounts have diverted money from the traditional Social Security system.

Under the Bush plan, the government would calculate how much each person diverted and put into his or her private account. Those private accounts would be assumed to earn 3 percent a year, and a monthly benefit would be calculated based on accumulated principal plus 3 percent per year. The government monthly benefits would be reduced by an equal amount.

When you retire, you get the reduced government benefit, plus income generated by your personal account.

In practical terms, that means a person setting up a private account would enjoy a greater total benefit than one who didn't if the personal account earned more than 3 percent interest per year. If the account earned less than 3 percent, a person would be better off staying in the traditional system and getting the full Social Security benefit.

Where would people invest the money? Aren't the stock and bond markets risky?

Stock and bond markets can go up or down. Under the Bush plan, workers could invest in a limited number of mutual funds, just like federal workers now do.

Workers approaching retirement would automatically be invested in a fund that becomes more conservative, with more bonds and certificates of deposit and fewer stocks, as they got older. Some proposals would give workers more investment choices after they've accumulate several thousand dollars in their personal accounts.

Won't these personal accounts reduce money going into the Social Security system?

Yes, and that's why Democrats say they would make the problem worse. Supporters reply that after an expensive transition to the new system, the program will be stronger because individual benefits will be funded in advance, and because beneficiaries will benefit from higher returns available in private stocks.

How big are Social Security's problems?

Beginning as early as 2018, Social Security will pay out more benefits than it collects in taxes each year. The program's trustees say that by 2042, the money saved up from past surpluses will be depleted and the system will be able to pay only 73 percent of the now-promised benefits. That problem could be solved by raising taxes, cutting benefits or a combination.

One proposal would cut benefits by changing the way initial payments are calculated. Under current law, they are calculated based on the rate at which wages rise each year, so that Social Security replaces a defined chunk of pre-retirement earnings.

The new way proposed would calculate initial benefits based on the rate of price inflation rather than inflation in wages, which tends to be greater. The effect would be to cut benefits and, according to critics, exclude retirees from enjoying a rising standard of living.

Other ideas include discouraging people from taking Social Security benefits early and raising the retirement age, now set to reach 67.