WASHINGTON – Warning that Social Security is nearing “bankruptcy,” President Bush outlined new details of his plan for private Social Security accounts in his State of the Union speech yesterday, proposing that workers be given the option of transferring two-thirds of their Social Security payroll taxes into the accounts over time.

He left to Congress the decision about how to pay the initial costs of creating the accounts, estimated at more than half a trillion dollars, and how to close the long-term projected shortfall in the public retirement system, estimated in the trillions.

“Fixing Social Security permanently will require an open, candid review of the options,” Mr. Bush said. “I will work with members of Congress to find the most effective combination of reforms.”

Declaring that the system is “headed toward bankruptcy on its current path” – prompting groans from Democrats – Mr. Bush said increases to the retirement age, cuts in the rate of growth of benefits, discouraging the early collection of benefits, and limits on benefits for the wealthy are all options that “are on the table.”

Mr. Bush opened his address by saluting the “newly elected leaders of Afghanistan, the Palestinian territories, Ukraine, and a free and sovereign Iraq.”

“The whole world now knows that a small group of extremists will not overturn the will of the Iraqi people,” he said.

Saying that America will “encourage a higher standard of freedom” in the Middle East, the president pledged $350 million to support political, economic, and security reforms in the Palestinian territories.

“The beginnings of reform and democracy in the Palestinian territories are showing the power of freedom to break old patterns of violence and failure,” Mr. Bush said. He called on Saudi Arabia and Egypt to “show the way toward democracy in the Middle East.”

The new secretary of state, Condoleezza Rice, travels to Israel and the West Bank today to meet with Israeli and Palestinian leaders.

Calling Iran “the world’s primary sponsor of terror,” Mr. Bush said to the Iranian people, “As you stand for your own liberty, America stands with you.”

First lady Laura Bush watched the speech flanked by an Iraqi voter and by the mother of a Marine who died in Iraq. At one emotional moment in the speech, the two women embraced while Ms. Bush looked on.

The emphasis of the speech was on domestic policy, and the president prefaced his proposals with an emphasis on the need for “spending discipline.” Mr. Bush said he would send to Congress a budget that holds the growth of discretionary spending below inflation, makes tax cuts permanent, and stays on track to cut the deficit in half by 2009. The budget will reduce or eliminate more than 150 government programs the president said “are not getting results, or duplicate current efforts, or do not fulfill essential priorities.”

Mr. Bush used his speech to promote various domestic proposals, including a tax credit to help low-wage earners buy health insurance, an overhaul of the tax code, a constitutional amendment to ban gay marriage, and a guest worker program for immigrants.

“It is time for an immigration policy that permits temporary guest workers to fill jobs Americans will not take, that rejects amnesty, that tells us who is entering and leaving our country, and that closes the border to drug dealers and terrorists,” he said.

Mr. Bush also announced he would “dramatically expand” the use of DNA evidence to prevent wrongful convictions and would send Congress a proposal to pay for special training of defense lawyers in capital cases.

The centerpiece of the speech was his plan for Social Security, which he called “one of America’s most important institutions – a symbol of the trust between generations.”

Providing the most details to date on his proposal for private accounts, Mr. Bush said workers should have the option of eventually transferring 4 percentage points of their Social Security taxes into private accounts.

The 12% Social Security tax is equally divided between employers and employees, who each pay 6 percentage points.

The money would be invested in a number of conservative funds pre-approved by the government, and they would earn a higher rate of return that the government bonds currently held by the Social Security trust fund, he said.

“Here is why personal accounts are a better deal,” Mr. Bush explained. “Your money will grow, over time, at a greater rate than anything the current system can deliver – and your account will provide money for retirement over and above the check you will receive from Social Security.”

Democrats criticized Mr. Bush for not explaining whether he would cut benefits or increase the debt to cover the long-term shortfall in the system. Senator Schumer denounced the proposal as a “code word for the ultimate undoing of Social Security.”

The accounts do not address the long-term solvency of the system, confirmed a White House official who briefed reporters on the plan earlier in the day.

In his speech, Mr. Bush emphasized that the accounts would be strictly optional, and would not affect anyone near retirement age. “I have a message for every American who is 55 or older: Do not let anyone mislead you. For you, the Social Security system will not change in any way,” he said.

The president said the money would only be permitted to go into a conservative mix of bonds and stocks, and would not be “eaten up by hidden Wall Street fees.”

The accounts could be structured to protect people near retirement from sudden swings in the stock market, and would not be permitted to be withdrawn all at once, he said.

The accounts would begin gradually, with yearly limits on contributions that would increase over time until all workers could set aside 4 percentage points of their payroll taxes in their accounts.

In the first year, contributions to the accounts would be capped at $1,000, according to a White House official who briefed reporters yesterday. The cap would rise each year by $100 to keep up with rising wages.

The accounts would be phased in, beginning in 2009 for people born in 1965, or turning 40 years old this year.

In the second year, accounts would be available to people born in 1978 and earlier. All workers would be eligible in the third year.

Account holders would not be allowed to draw money from the accounts before they retired, and after retirement, they would have to buy an annuity through the federal government that would provide payments sufficient to keep them above the poverty level.

Any additional money could be withdrawn by the retiree in lump sums, and, would be inheritable – unlike the annuity.

The program would have a central, public administration, modeled on the existing Thrift Savings Plan available to federal government employees, which offers five stock and bond funds whose historic annual returns average between 6% and 10%.

Management of the accounts would be contracted by the government through a bidding process, though many of the administrative costs would be handled by the federal government, rather than Wall Street, the official said.

The White House estimates the administrative costs to be 30 basis points, or 30 cents for every $100 invested. The White House predicts the private accounts would not add new costs to the system in the long run, because they would replace an equal amount of scheduled benefits.

In the near term, however, the transition to the accounts would cost $664 billion through the end of the 2015 budget, and an addition $90 billion in debt servicing, the official said.

The financing details would depend on the overall package for dealing with the trust fund’s shortfall, said a White House official.

Recalling the past proposals of Democrats such as President Clinton and the late Senator Moynihan, Mr. Bush said he would “listen to anyone who has a good idea to offer.”