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© St. Petersburg Times, published November 30, 2001
WASHINGTON -- For years, many politicians -- mostly Republicans -- have advocated creating small, private investment accounts for American workers to help secure the future of Social Security without tax increases or benefit cuts.
After months of intensive work, President Bush's Social Security commission has come up with three alternative plans for private accounts -- none of which will guarantee the solvency of the system without cutting benefits, adding tax revenue or doing both.
"There is no pain-free way of solving Social Security," acknowledged Richard Parsons, an AOL-Time Warner executive and co-chairman of the commission. "There are ways of solving the problem, but they are not pain-free."
To finance one option, the commission members would even defy President Bush's ban against tax increases by raising from $84,000 to $86,000 the maximum annual income on which payroll taxes are collected. This idea will not be included in the commission's final report, however, if Bush tells them to reject it.
The proposals were outlined Thursday at a meeting of the 16-member bipartisan commission. All would give workers the option of diverting a portion of their Social Security payroll taxes into private investment accounts. They differed primarily in their handling of "defined benefits" -- guaranteed, scheduled payments apart from the investment accounts.
The commission members agreed that the proposals would be presented as alternative solutions to guaranteeing Social Security solvency in their final report to the president. They will meet again, possibly before Dec. 11, before approving the report.
Critics were quick to condemn the three options. Hans Riemer, senior policy analyst for the Institute for America's Future, which opposes private accounts, said the proposals demonstrate what critics have always known: private accounts are not a panacea for Social Security.
"They want you to believe it's a free lunch -- that you can get your private accounts and your regular Social Security benefits, too," Riemer said. "We've all known this was not true, but they've never been willing to admit it. This proves it."
As a result of these perceived flaws, Riemer and other critics predicted Congress would reject all the proposals, even if Bush endorses one. "This will set the debate on how to fix Social Security backwards," he said.
As explained by members of the commission, the proposals are:
Option One: Workers could invest 2 percent of their pay into a private account, and younger workers might be able to supplement the contribution out of their income. In exchange, they would be required to reimburse the Social Security trust fund from their investment income at a 3.5 percent interest rate.
Result: It would create private accounts, but without guaranteeing the future solvency of Social Security. Defined benefits would be cut an estimated 30 percent unless additional revenues are added.
Option Two: Workers could invest 4 percent of their pay in personal accounts, up to $1,000 a year. They would be required to reimburse the trust fund from their investment earnings at a 2 percent interest rate. Their defined benefits upon retirement would be determined on an inflation-based formula, not on the current wage-based formula.
Result: It would create private accounts, but defined benefits would fall far below current levels because the inflation rate rises more slowly than wages. The system would be solvent in the distant future, but new revenues would be needed to fund a costly transition in the near term.
Option Three: To create a voluntary investment account, workers would have to contribute 1 percent of income to the accounts, and then 2.5 percent could be invested from their payroll taxes, up to a maximum of $1,000 a year. Low-wage earners would get tax credits for initial investment. Benefit growth from trust fund would be indexed to life expectancy beginning in 2009. Low-wage workers would be guaranteed benefits of no less than 100 percent of the poverty level, and benefits for high-wage workers would be trimmed.
Result: It would create private accounts, and total future benefits would be equivalent to the current level. Solvency would be assured, but additional revenues would be needed. One option for generating new revenue is to raise the maximum wage that can be taxed to $86,000.
Under a mandate from Bush, all the proposals must create private accounts. Bush also instructed the commission to avoid any direct tax increases.
Parsons said commission members are seeking Bush's advice on whether Bush would consider raising the maximum taxable wage as a tax increase. "We're not clear whether it is within bounds or outside the bounds that the President imposed on the commission," he said.
No matter what the President decides about raising the maximum taxable wage, Riemer said, none of the proposals could be created without substantial revenue increases, which would inevitably come from the government's tax-funded general revenues. Therefore, Riemer and other critics concluded, all proposals would essentially raise taxes.
Parsons acknowledged that general government revenues would be needed to finance the transition to a new system. And former Democratic Rep. Tim Penny, a commission member, said the need for added revenues was "sort of hidden" in the commission's explanation of the proposals.
Max Richtman of the National Committee to Preserve Social Security and Medicare, which opposes private accounts, said such a huge infusion of tax revenues into Social Security would likely fix the system without doing anything else. "One could guarantee full solvency over a 75-year period much cheaper without individual accounts," he said.
Critics focused heavily on the second option, which they argued would cut defined benefits by as much as 48 percent. Parsons countered that benefits would not be cut, but simply would grow more slowly under the plan.
The commission's projections assume that private investment accounts would yield 4.6 percent.