A Look Back at the Bush Plan

Every few years, someone drags Social Security out onto the national stage, shines a harsh spotlight on it, and announces—usually with the calm confidence of a man explaining compound interest to a golden retriever—that what the program really needs is a makeover involving Wall Street.

In the mid-2000s, President Bush floated the idea of “personal accounts,” and the discussion quickly collapsed into a familiar shouting match:

• Republicans heard, “You can own your retirement!”
• Democrats heard, “They’re going to turn Grandma’s check into a day-trading app!”

The partisan rhetoric doomed the proposed plan before it had any chance to be seriously studied or modeled.  In the last two decades there has been no serious discussion about changing the Social Security system even though we all know it has serious problems.

It is roughly 17 years since the Bush Plan would have been in effect, so let’s do something unfashionable: let’s assume everyone remains calm, lower the volume, and walk through what the proposal actually meant, what it would have meant financially, and what it might mean for the average retiree today if the diverted money had been invested in a plain-vanilla S&P 500 index fund.

This is a blog, not a dissertation, so I’m going to keep the math honest, but not joyless.  So, what was the plan?

The popular memory is that Bush wanted to “privatize half” of Social Security.  The most concrete version of the plan that got widely modeled wasn’t “half.”  It was more like: “You may divert a small slice.”

In the most widely analyzed design, the personal account would be funded by diverting up to 4% of the payroll tax, subject to a dollar cap that started at around $1,000 a year and rose over time.  In other words, it was a limited diversion and not a full-blown transfer of the whole program into your Fidelity login.

That detail matters, because it means the personal account was never going to grow into a yacht for the “average” worker… More like a modest financial dinghy—possibly a very nice dinghy—depending on the ocean.

This is an important detail: Your Social Security check goes down if you opt in.  That’s the part that gets lost in the political bumper-sticker version.  If you divert payroll taxes into a personal account, your traditional Social Security benefit gets reduced.  Not because the government is being mean, but because you didn’t pay those taxes into the system, so you don’t get paid as if you did.

The personal account in our model is that all the funds diverted go into an S&P Index Fund that grows or declines with the stock market.  At your retirement, your personal account pays you something too, and your total retirement income becomes:

    (Smaller Social Security check) + (Personal account payment) = Total

So, yes, your Social Security check would be smaller.  The question is whether the personal account would make up the difference, and then some.

Now, the big hypothetical: What if the personal account was invested in an S&P 500 index fund?

The scenario we’re using

• We’re looking at a new retiree in 2026 (turning 65 and retiring around now) who earned an average income each year.
• They opted into the personal account in 2009 and contributed the maximum allowed each year under the capped design.
• The money was invested in a low-cost S&P 500 index fund, with a small annual fee assumption (think “boring and responsible,” not “crypto enthusiast at 2:00 a.m.”).

What happens to the monthly Social Security check?

Under this scenario, the offset would reduce the retiree’s monthly Social Security check by about:

• $276 to $284 per month (in today’s dollars)

So, if someone says, “Privatization would raise your Social Security check,” the polite reply is: No.  It lowers the check, and then adds a second check.

What does the personal account pay per month?

Under the same scenario, the personal account would generate about:

• $530 to $593 per month (in today’s dollars)

This is where the stock market does its dramatic entrance, wearing sequins.

Net result: total monthly retirement income.  Put the two together:

• Social Security check goes down: –$276 to –$284
•  Personal account adds income: +$530 to +$593
•  Net change: +$255 to +$309 per month

So, in this specific “average new retiree in 2026” scenario, the retiree’s total monthly income would likely be higher than under current law—by a few hundred dollars a month.  And remember, this is what would happen if we diverted only a small portion of the funds into the private sector.

That’s real money.  It’s not a second home in Aspen, but it’s also not “nothing.”

But wait: does that mean the plan “solves” Social Security?  No, and this is where the policy conversation gets slippery.  The trust fund problem doesn’t vanish; it shape-shifts.

Social Security’s financing challenge is largely a question of cash flow: payroll taxes come in, benefits go out, and demographics are doing what demographics always do—namely, refusing to ask permission as they run roughshod over your plans.

If you divert payroll taxes into personal accounts, the trust funds receive less money up front.  But retirees still need to be paid their benefits during the transition.  That creates transition costs.  In normal-person terms, it means:

The government either:

• borrows,
•  raises other taxes,
•  cuts benefits,
•  or it does some mixture of all three,

to keep sending checks while part of the payroll tax stream is being rerouted.  The original Bush plan was to divert funds from the general fund into Social Security to match what was being diverted.  If this wasn’t done, the Social Security trust fund would be in worse financial shape than it currently is.  If Congress fails to divert funds, the trust fund, already in terrible financial shape, gets worse.

Could the long-term picture improve if the offset is structured a certain way, participation is limited, benefit growth is changed, or additional financing is added?  Yes.  But personal accounts by themselves are not a magic wand that makes arithmetic stop being arithmetic.

The inheritance question: What could the average retiree leave to heirs?

Here’s where personal accounts do something traditional Social Security generally does not: they can create a pile of money with your name on it.  Under the present system, if a retiree dies after receiving benefits for only one month, his family receives a one-time death benefit of $255.  The rest of the money the retiree paid into the system vanishes.

Under the same scenario, the personal account at retirement would be about:

• $95,000 to $106,000 (in today’s dollars)

Since this money is in a private account, the total funds would be available to the retiree’s family upon the death of the retiree if the retiree opted to only receive the interest off the fund and not spend the principle.

In other words, personal accounts introduce a new freedom: you can choose a higher monthly income now, or a larger bequest later.  Social Security, as designed, is much more “lifetime insurance” than “inheritable asset.”

So, was the Bush plan a good idea?

The honest blog answer is: it depends on what you’re optimizing for, and how lucky you get.

Potential upside:

• A strong market period could boost total retirement income for average retirees.
•  Personal accounts can create inheritable wealth, especially for people who die earlier, or who don’t spend down the account.
•  People like owning things with their name on them.  This is not a trivial political fact.

Potential downside:

• Market risk becomes retirement risk.  If the market does badly during your contribution years, or right before retirement, your “private” portion shrinks, but the offset doesn’t sympathetically shrink at the same pace.
•  The transition financing is real, and it can increase federal borrowing pressures in the years it matters most politically (which is to say, all years ending in a number).

The takeaway, in plain English.  If an average new retiree in 2026 had been allowed to divert the maximum under the capped design, and that money had tracked an S&P 500 index fund through the 2009–2025 market run, then:

• Their Social Security check would likely be about $280/month smaller,
•  Their personal account would likely add about $560/month,
•  Their total monthly income would likely be about $255–$309/month higher, and
•  They might have something like $95,000 to $106,000 in “surplus” account value that could be preserved for heirs, if they didn’t spend it.

That’s the sunny version, because the stock market in that period was, frankly, in a good mood.  The darker version is the one nobody can calculate cleanly ahead of time: what happens when the market is not in a good mood, but you are still trying to pay rent.

And that, right there, is why this debate never dies: it’s a tug-of-war between the appeal of ownership, the comfort of insurance, and the unavoidable fact that the future is going to do whatever it wants, regardless of our spreadsheets.