Analysis By Steve Schifferes BBC News Online economics reporter

US senior citizens receive generous social security benefits

The social security system has been the talisman of the American welfare state.

Established by President Franklin Roosevelt in the depth of the depression in the 1930s, it established a generous system of state pensions for old age based on income and contributions.

It is now the largest single spending programme of the Federal government, costing nearly $500bn each year.

With the growing budget deficit, attention has been increasingly focusing on controlling the cost of such "entitlement" programmes where payments increase automatically as more people retire - something likely to happen as the "baby-boomer" generation begins retiring after 2015.

Now President Bush's council of economic advisors have revived a radical plan to partly privatise social security.

Funding problem

Under one version of the President's plans, younger workers (under 40) would be allowed to opt-out of most of their social security payroll taxes.

Instead they would put aside 4% of their income in a personal retirement account which they could invest in the stock market.

The need to add resources to the social security system is no less pressing now that the surpluses have disappeared; Council of Economic Advisors Annual Report click here for budget deficit graph

The idea is that the returns might be higher if workers put their money in stocks and bonds, and by building up a substantial pre-funded retirement savings pot, the problem that there will be fewer workers in the future to fund retirement will be avoided.

The difficulty is paying for the transition to such a system.

Since the current social security system is a pay-as-you-go system, making up the shortfall could cost between $1-2 trillion.

The money would have to be borrowed by issuing special government bonds, increasing the government's overall indebtedness by 50%, and adding 23.6% to the debt-to-GDP ratio (which is currently 38.5%) by 2036.

Reform needed

But the annual report from the Council of Economic Advisors argues that "this temporary increase in government borrowing" is not a problem "from an economic perspective".

President Bush wants to create personal retirement accounts

"The deficit initially rises, but then falls as the reform is phased in," they say.

Originally, President Bush planned to use the huge projected budget surpluses to fund his social security reform.

But the advisors argue that the growing budget deficit is not a reason for refraining from radical reform.

"Since the budget surpluses forecast a few years ago have not materialised, critics argue that adding personal retirement accounts to social security is impossible or impractical."

"In reality, the need to add resources to the social security system is no less pressing now that the surpluses have disappeared; indeed, they may be more so," the report says.

The authors warn that without reform, the total unfunded social security deficit could reach $10 trillion.

According to the report, if no action is taken then Federal spending will rise from 20% of GDP now to 30% of GDP by 2080, excluding debt interest payments.

Political problem

Attempts to reform social security have caused a political firestorm in the past, and several blue-ribbon commissions in the last decade have made recommendations, which have led to reductions in benefits, a delay in retirement age, and increases in payroll taxes.

Democrats argue that Mr Bush's plans would add to the deficit, take resources away from the private sector, and lead to interest rate rises.

And some independent experts argue that the costs and fees involved in setting up private retirement accounts would outweigh the benefits for people on moderate or low incomes.

Congress may be reluctant to consider these proposals during an election year, and last year's bitter battle over the reform of the other major entitlement programme, Medicare, shows how difficult change can be.

But if Mr Bush manages to win re-election with an increased majority in Congress, radical reform of social security could be back on the agenda.