President Bush is expected to unveil his plan for a Social Security overhaul in late February, with administration officials eyeing investment accounts that would hold two-thirds of workers’ annual payroll taxes.
An administration official, who spoke on condition of anonymity, said the size of the private accounts could be similar to those in a proposal by Sen. Lindsey Graham, R-S.C., and the main plan from Bush’s 2001 Social Security commission.
The White House cautioned Tuesday that Bush had not decided on a specific plan.
But the administration is leaning toward letting workers divert 4 percentage points of their 6.2 percent in payroll taxes – almost two-thirds – into investment accounts, up to $1,000-$1,300 a year, the official said. The remainder of the workers’ payroll taxes would continue going into the system.
Graham’s plan calls for annual contributions to be capped at $1,300, while the commission proposed a $1,000 cap.
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.”
Rep. Charles Rangel of New York, the top Democrat on the House Ways and Means Committee, scoffed at the White House claim of bipartisanship.
“If he’s going to create Democratic friends, he hasn’t started it yet,” Rangel said in an interview.
Bush will probably find political opposition to changing Social Security, often called the “third rail” of American politics, from Republicans and Democrats.
“There is still a lot of juice of electricity in that third rail, and Republicans are not immune to it,” Rangel said.
Bush also faces a formidable challenge from AARP. The group, whose 35 million members are age 50 and older, has launched a major advertising campaign to oppose Bush’s plan to divert money from the retirement system into personal accounts. The group contends the accounts amount to gambling with retirement savings.
“Winners and losers are stock market terms. Do you really want them to become retirement terms?” one ad says.
To sell the idea of a Social Security overhaul – and private investment accounts – the administration is trying to duplicate its successful effort garnering support for tax cuts.
At an event planned for next Monday, Bush will meet with White House-approved people of varying ages to illustrate how changes to Social Security would affect different generations. To gain support for its tax-cut packages, the administration featured “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 it’s pressing for larger accounts that would let workers invest all of their payroll taxes.
“This is the way the president tends to campaign on these issues,” Tanner said. “He hasn’t lost one he wanted to win yet.”
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, John said.
Social Security is projected to start paying out more in benefits than it collects in taxes in 2018, though it can cover full benefits until 2042. Then, the system will be able to pay about 73 percent of promised benefits.
The administration so far has refused to discuss the difficult financial tradeoffs required to remake the system.
For example, any proposal offered is likely to cut traditional benefits for younger workers to help fund the future shortfall, with returns from their private accounts expected to cover, but not guarantee, the difference. 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.
In the main plan offered by Bush’s commission, promised benefits would be cut for many workers, with reductions ranging from 0.9 percent to 45.9 percent. Investments in the personal accounts are counted on to make up the income loss.
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 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 in 2075, the monthly promised benefit of $2,032 would be cut by 45.9 percent to $1,099 a month.
In each case, income from the worker’s private account, funded with a portion of their Social Security tax, would be expected to at least make up the difference.