President Bush devoted a major section of his State of the Union address to Social Security reform efforts.[@@]

Early in the speech Wednesday, Bush mentioned proposals to review and reform the entire tax code, create a system of national association health plans and expand the health savings accounts program. But the longest section of interest to insurers was a discussion of a proposal to establish a system of privately managed Social Security accounts that would give holders a chance to invest a portion of their contributions in stock and bond portfolios.

The Social Security program trustees now invest program assets in a special series of U.S. Treasury securities.

Democrats have organized an effort in recent weeks to question whether the Social Security program faces a genuine funding crisis, or whether the Bush privatization plan would do more in a time of sluggish economic growth to maintain retirement benefits than the current Social Security trust fund investment strategy.

But “the system on its current path is headed toward bankruptcy,” Bush argued.

The system will pay out more than it takes in starting in 2018, and after that, “every year will bring a bigger shortfall,” Bush said.

Bush noted that, in the past, former President Clinton and other Democrats have presented Social Security finance reform proposals of their own.

Bush gave a few more details during the State of the Union address than he has before about the kinds of safeguards that might be built into a “voluntary personal retirement account” system.

- The Social Security system would not change for U.S. residents who are 55 or older.

- Eventually, workers might be able to contribute as much as “4 percentage points of their payroll taxes” to the personal Social Security accounts.

- Private account assets could go only into a conservative mix of bonds and stock funds.

- The program would ensure that participants’ “earnings are not eaten up by hidden Wall Street fees.”

- The program would include “good options” to protect participants from sudden market swings on the eve of their retirement.

- Participants could not empty the accounts all at once and would have to draw benefits out over time.

Sen. Harry Reid, D-Nevada, the Senate minority leader, criticized the private account concept in his rebuttal speech.

“Maybe it’s not really Social Security reform,” Reid said. “Maybe it’s more like Social Security roulette.”

So far, Reid and other critics of the privatization proposal have focused mainly on attacking the privatization concept and have focused little attention on the kinds of principal guarantees or other participant-protection options that Bush talked about.

Many insurers already offer principal protection to purchasers of variable annuities.

However, although principal-protection features can mitigate the risk of market downturns, “these features may also reduce the potential upside investment return while adding to the overall cost of private accounts,” according to Catherine Collinson, a retirement trends expert at the Transamerica Center for Retirement Studies, Los Angeles.

The White House has posted the text of the president’s speech and a link to a video recording of the speech at http://www.whitehouse.gov/news/releases/2005/02/20050202-11.html