What A Social Security Deal Could Look Like

Business Week reports For months, the Social Security debate has been stuck in an endless round of recriminations between President George W. Bush and Capitol Hill Democrats. But with House and Senate committees ready to start drafting a Social Security overhaul in June, partisan whining is likely to wind down. And while it is too early to know whether Bush and Congress will reach a deal, the framework for an agreement is -- surprisingly -- beginning to take shape. Any compromise would fall far short of Bush's goal of fundamentally overhauling Social Security. It would make big changes to the program yet retain a basic government-provided benefit for all Americans. It would secure the system's financial solvency for many years by cutting promised benefits and raising payroll taxes on high-income workers. But it would not ensure permanent financial stability, as the President has demanded. An agreement would also include some form of personal accounts, just not the White House version.

If they allow part of the FICA tax to go to the personal accounts, they are worth considering, because the amount can always be increased in the future, but if they substitute add on accounts for personal accounts, it is a non-starter.

And new savings incentives -- sometimes called add-on accounts -- would be created outside the current Social Security system.

Add on accounts are good as long as we establish the idea of at least some of the FICA tax going to personal accounts.

"I can see an agreement along those lines," says Heritage Foundation research fellow David C. John, "assuming both sides come off their absolute positions." Such a deal would leave both factions with something to brag about. Bush could say he engineered an historic agreement to fix the program -- and Republicans could get the issue of Social Security off their backs. Democrats could say they saved the system from GOP attack. And everyone could take credit for new savings vehicles, which would be included in a Social Security package being cobbled together by House Ways & Means Committee Chairman William Thomas (R-Calif.). That's why insiders see a quiet consensus developing around Reform Lite. Republicans seem increasingly willing to abandon Bush-style accounts and their opposition to any tax increases. And Democrats have privately expressed a willingness to accept benefit cuts and hand Bush half a victory rather than be seen as blocking needed changes. "We are getting within striking distance of really constructive proposals," says a leading Democratic Social Security strategist. That's not to say a deal is at hand. Hard-line Republicans will resist tax hikes, especially if they don't get big personal accounts.

I would consider supporting a plan that included some personal accounts, if only 2% rather than 4%

And unions remain dug in behind a Maginot Line of opposition to any changes. Senior Ways & Means Democrat Charles B. Rangel (D-N.Y.), says Dems won't budge until the GOP signals compromise by abandoning Bush-style accounts. Consensus "is still a long shot," says former Congressional Budget Office Director Robert D. Reischauer. In the end it will be up to Bush. Will he reject compromise and make Democratic "obstructionism" an issue in the 2006 elections? Or will he sign a bill with less radical change than he wants? The betting is that Bush will go along with almost any deal and drag reluctant Republicans along, as he did with the costly Medicare drug law in 2003. A compromise would include three major elements: trimming benefits, boosting taxes, and some version of private accounts.

Key lawmakers concede that Congress may not have the political will to cut benefits and raise taxes enough to make Social Security permanently self-financing. It is more likely that they will agree on a package of cuts in promised benefits that would strengthen the system for several decades. Most changes will be aimed at higher-income retirees, but total benefit cuts will be much less steep than Bush has suggested. For example, Social Security now replaces about 35% of the average wage of workers earning $60,000. Trimming that to, say, 32%, would fix about 10% of the problem. Another likely change: Today's retirees get an annual cost-of-living adjustment based on the consumer price index. Look for those increases to shrink. For instance, shifting to a new index that better reflects the actual price increases faced by seniors would reduce the system's shortfall by about 14%.

Lawmakers could also adjust benefits to reflect rising life expectancy or speed up the shift to a retirement age of 67, which will now be reached by 2027. That would fix about 25% of the shortfall. Taken together, these changes could cover about half of the long-term gap. To close the rest, Congress will raise taxes. Bush has carefully left the door open to imposing the Social Security tax on salaries above the current $90,000 cap. Key players such as Senator Lindsey Graham (R-S.C.) have embraced such a plan. Most House Republicans hate it, but a tax increase on top wage earners has broad public support. The most likely change: taxing wages up to $140,000. Hitting those workers with the full 12.4% tax would close about 40% of the shortfall. Bush's original plan, which would have allowed workers to shift as much as one-third of their payroll tax into personal accounts, is dead. But Thomas is exploring ways to enhance savings outside of Social Security, an idea that could win support from groups such as AARP, the powerful seniors' lobby. "It's a better way to look at the problem," says AARP policy director John Rother. "But we'll have to see what the pieces look like."

There are three possible pieces to such a package. Republicans would like to see income limits removed for IRAs, 401(k)s, and especially Roth IRAs, whose withdrawals are tax-free. Democrats want new savings incentives for low-income workers,

That is easy. Let them put some of their FICA into personal accounts.

and lawmakers of both parties see the need to fix defined-benefit pensions. The deal could also boost payroll taxes to encourage new savings. Former Bush economic aide Lawrence B. Lindsey has floated the idea of hiking the tax rate by, say, one percentage point, and allowing workers to direct that money into private accounts. A compromise might also allow workers to shift perhaps $1,000 of their current payroll tax into accounts. Any agreement, however, could easily collapse in partisan acrimony. But with a compromise beginning to rise from the legislative muck, House Social Security subcommittee Chairman Jim McCrery (R-La.) says: "I'm optimistic we're going to develop a plan." The chances of a deal this year remain less than 50/50 -- but those are better odds than you could get in Washington just a few weeks ago.

Stanley Kurtz blogged This scenario will not delight everyone. I certainly find it less than thrilling. But it’s too early to know the exact shape of an agreement. The main point is that a compromise on Social Security is a lot more likely than most people realize.

Bloomberg reports Pressure is building on Democrats to offer ideas on how to shore up Social Security and increase the nation's retirement security, not just oppose the president's plan. The pressure threatens to expose internal rifts that have thus far been camouflaged by their universal opposition to Bush's plan. The result is a growing dilemma for Democratic lawmakers. If they refuse to advance their own plan or negotiate with Republicans, they risk being painted as obstructionists and outflanked. If they do come to the table, they risk having Republicans exploit their internal divisions and being outvoted when the final version of the measure is crafted.

On one side of the debate are Democrats who argue that, with House Ways and Means Committee Chairman Bill Thomas now trying to widen the Social Security debate to include issues like health care and pensions, the time has come to show their cards. "They're missing an opportunity to present what the Democrats would do with Social Security besides just opposing carving out private accounts," says Bob Kerrey, a former senator from Nebraska who is now president of New School University in New York. Key constituency groups such as AARP, the nation's largest senior-citizens' group, and the Teamsters union, which have opposed the Bush plan, now say they are interested in what Thomas may have to offer.