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House Social Security bill hints at trade-offs
©New York Times
© St. Petersburg Times, WASHINGTON -- Offering a detailed look at what it may take to overhaul Social Security, two influential members of Congress have developed a proposal that will achieve President Bush's goal of creating investment accounts for all workers -- but at the cost of substantial cuts in guaranteed benefits. The proposal, to be introduced in the House, largely tracks the general approach set out by Bush when he established a commission this spring to develop a specific plan. The commission is just beginning its work. While it is impossible to know what Bush's plan will look like, the new congressional plan is a window into the painful trade-offs the president and his commission will face. Its authors said they hoped that putting a detailed plan on the table would help Bush in his effort to transform Social Security, a goal that is among the most ambitious and politically divisive on the administration's agenda. Since the presidential campaign, Bush has promoted the benefits of allowing workers to invest part of their payroll taxes in stocks and bonds. But he has avoided specifying how he will pay for the transition to the investment accounts, or saying what other measures he will back to ensure that Social Security can pay promised benefits to the 76-million baby boomers after they retire. The authors of the congressional proposal, Rep. Jim Kolbe, R-Ariz., and Charles Stenholm, D-Texas, are among the leading supporters in the House of putting personal accounts at the heart of the overhaul effort. But the two said personal accounts alone would not solve the problem. To pay for the accounts and to put the system on sound footing, they said they would propose the following: Reduce the guaranteed benefit, especially for middle- and upper-income workers; Increase the level of earnings subject to the Social Security payroll tax; Reduce cost of living adjustments; Accelerate the current schedule for raising the retirement age to 67 from 65; Reduce annual benefits further in line with any future increases in life expectancy. The plan will also divert some tax revenues from Medicare, worsening the already weak financial condition of that program. Kolbe and Stenholm said the proceeds from the investment accounts would at least make up for the cuts in the guaranteed benefit. Moreover, they said, the system would avert the certainty of even bigger benefit cuts and huge tax increases if nothing was done. To offset some of the proposal's painful measures, the plan would provide benefit increases to low-income workers and would also match part of any money invested by people with low incomes in their personal accounts. But even with the sweeteners, Kolbe and Stenholm said they knew their plan would attract intense criticism. Stenholm said he and Kolbe were like canaries being sent into a mine shaft. "If we survive, maybe others will venture into the subject," Stenholm said. Most of the changes would be phased in so that they would not affect anyone now receiving retirement benefits or within a decade of retirement. Critics of Bush's approach said the Kolbe-Stenholm bill showed that the administration would find it nearly impossible to come up with a politically acceptable plan that included private accounts -- at least without relying heavily on general tax revenues to pay part of the bill, a step the White House has made clear it will be loath to take. "The combination of the lack of general revenues and the diversion of financing into individual accounts creates unbearable pressure on the rest of the program," said Peter Orszag, a former Clinton administration economist who is an expert on Social Security. "What this plan illustrates is the difficulty of fashioning a politically viable Social Security reform proposal without using any non-Social Security revenue." Charles Blahous, the staff director of the Bush commission, said the panel would look at every constructive proposal. "The most important aspect of the Kolbe-Stenholm proposal is that it's a bipartisan collaboration, and we're trying to build a bipartisan atmosphere," Blahous said. Social Security is taking in more through payroll taxes than it needs to pay benefits. But that situation will change rapidly starting in about 15 years as the bulk of Americans born from 1946 to 1964 move into retirement. By 2016, under current projections, Social Security will need to start drawing on its holdings of government bonds to pay benefits. By 2038, the bonds will be exhausted, leaving the system capable of paying only about 72 percent of promised benefits. Most Republicans in Congress support the idea of private accounts, but they have been reluctant to back any plan that requires benefit cuts or tax increases. Most Democrats oppose private accounts, saying that they do nothing to solve the system's problems and introduce risk into what should be a guarantee against poverty in old age. With the problem still years away, neither party has made a serious push so far to address the issue. Kolbe and Stenholm have been pushing versions of their plan for several years but have generated little overt support in Congress. The significance of their bill lies less in its prospects for passage, which are slim, than in their willingness to prepare the public on Bush's behalf for the tough choices that were obscured when the issue was last aired, in the presidential campaign. "We have to acknowledge that there isn't a fix to this problem that doesn't include spinach along with the ice cream," Kolbe said. At the heart of the Kolbe-Stenholm plan is a mandatory personal investment account for all workers covered by Social Security. The plan will direct into an account 3 percent of the first $10,000 in earnings, and 2 percent of additional earnings up to the maximum subject to the payroll tax, which this year is $80,400. A worker making $10,000 a year would place $300 a year into the account. A worker making $80,400 or more would place $1,708 in the account each year. The proposal would allow additional voluntary contributions up to $5,000 a year. To help low-income workers build up their assets more quickly, the plan would provide a partial government match for their voluntary contributions. According to preliminary calculations by the Social Security Administration, the Kolbe-Stenholm plan would reduce the guaranteed benefit for the average worker in 2020 to 81 percent of what it would be under current law. For people earning above the maximum annual amount subject to the payroll tax -- $80,400 this year -- the guaranteed benefit would be around 75 percent of the benefit under current law. But low-income workers would do as well or better under the Kolbe-Stenholm proposal than under current law, the projections show, even without including the proceeds from the private account. The plan would also impose a tax increase on upper-income workers by increasing the maximum amount of income subject to the payroll tax, an amount that already rises each year with inflation. If the plan were to take effect next year, the earnings ceiling for 2002 would increase to $90,800 from an estimated $84,900 if the law is not changed. To save money, the proposal would reduce cost-of-living adjustments, initially by one-third of a percentage point below the inflation rate assumed by Social Security's trustees and then by adopting a new inflation index being developed by the Bureau of Labor Statistics. To reflect increases in longevity, the proposal would move up by a decade, to 2011, the year at which 67 would become the normal age at which retirees could claim full benefits. The early retirement age would remain 62.
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