Social Security reform floated


Published: Wednesday, January 5, 2005 at 6:01 a.m.
Last Modified: Tuesday, January 4, 2005 at 11:15 p.m.
WASHINGTON - The Bush administration is focusing on a Social Security proposal that would allow younger workers to invest nearly two-thirds of their payroll taxes in private accounts, with contributions limited to about $1,000 to $1,300 a year, an administration official said Tuesday.
A proposal is expected to be unveiled in late February. But the White House cautioned that President Bush has not decided on a specific plan.
The administration official, who spoke on condition of anonymity, said the size of the private accounts could be similar to a proposal by Sen. Lindsey Graham, R-S.C., and a plan from Bush's 2001 Social Security commission.
Both plans let workers divert 4 percentage points of their 6.2 percentage points in payroll taxes into accounts. The federal 12.4 percent payroll tax is split between workers and employers. Workers' remaining 2.2 percentage points in taxes continue going into the system.
Graham's plan calls for annual contributions to be capped at $1,300, while the commission proposed a lower limit of $1,000.
Bush ''has not endorsed any specific proposal,'' White House spokesman Scott McClellan said. ''We are looking at a number of ideas for strengthening Social Security and will continue working closely with congressional leaders to move forward in a bipartisan way to get it done this year.''
To sell the idea of a Social Security overhaul - and private investment accounts - the administration plans to duplicate its successful campaign for tax cuts. At an event planned for Monday, Bush will meet with White House-approved people of varying ages to illustrate how changes to Social Security would affect different generations.
The strategy is similar to Bush's efforts to gain support for his tax cut packages by featuring ''tax families'' and their financial situations.
''That's the model,'' said Michael Tanner, director of the Cato Institute's Project on Social Security Choice. The libertarian think tank has been a longtime proponent of investment accounts, and is pressing for larger accounts by letting workers invest all of their payroll taxes.
''This is the way the president tends to campaign on these issues,'' Tanner said, noting similar strategies for Bush's Medicare and education plans.
Cabinet officials are stepping up their roles in the effort. Treasury Secretary John Snow, Labor Secretary Elaine Chao and others can be expected to visit communities across the country to bolster the administration's desire for change.
Selling the overhaul ''is more of a challenge than they expected,'' said David John, Social Security senior analyst at the conservative Heritage Foundation. The administration needs to spend time making the case for urgent reform, countering Democrats' claims that the severity of the future shortfall is being exaggerated, he said.
Social Security is projected to pay out more in benefits than it collects in taxes starting in 2018, though it can cover full benefits until 2042. Then, about 73 percent of promised benefits can be paid.
The administration so far has refused to discuss the difficult financial trade-offs required to remake the system.
For example, any proposal offered will cut traditional benefits for younger workers to help fund the future shortfall. Also, the administration must identify $800 billion to $2 trillion over 10 years to continue funding retiree benefits once the payroll taxes are diverted into accounts.
Under the main plan offered by Bush's commission, promised benefits would be cut almost in half for some younger workers, with reductions ranging from 0.9 percent to 45.9 percent. Investments in the personal accounts are counted on to make up the loss in income.
Cuts would occur by changing the formula used to calculate benefits. Growth in benefits would be slowed dramatically by tying them to inflation rates instead of wages. The rate of inflation grows more slowly than wages over a person's lifetime.
For example, a person retiring at age 65 in 2012 with an annual income of $35,277 is promised $1,194 in monthly benefits, in 2001 dollars. If the formula is changed, the monthly benefit would be reduced by 0.9 percent to about $1,183 per month.
The younger the worker, the more dramatic the cuts. For a person retiring at age 75 in 2075, the monthly promised benefit of $2,032 would be cut by 45.9 percent to $1,099 a month. Investments in the personal account would be expected to make up the difference.
''Drastic benefit cuts and the false promise of private accounts are recipes for disaster,'' said House Democratic leader Nancy Pelosi, D-Calif. ''Republicans keep saying that Social Security won't be there for today's workers - and if they get their way, they'll be right. The Republican proposals put forth so far do not make Social Security stronger. They make it weaker.''

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