New Social Security Proposals Promise 2004 Debate

December 22, 2003

President Bush is expected to promote individual accounts as a central theme in his reelection bid in the coming year. Julie Kosterlitz, a frequent commentator on Social Security and business and economics correspondent for the National Journal, writes in her column that the success of Bush's campaign can be greatly attributed to the recent introduction of several attractive reform proposals. Excerpts of Kosterlitz's column, "Social Security in Play in 2004," follow:

"The Bush administration is now hoping to use the 2004 campaign to build support for the president's brand of Social Security reform. At the core of his reform is the idea that individually owned and invested retirement accounts should replace a part of Social Security.

"Aides say that President Bush considers Social Security reform a pressing national issue, and of the big initiatives highlighted in his 2000 campaign, it is one of the few that remain unfulfilled. Getting out in front of an issue that has traditionally favored Democrats is also smart strategy for Republicans, said a senior White House official. 'It's much easier if you're on the offense, if you know the issue and talk about it, than to wait and be beat back into the corner,' the official said.

"The White House is letting Republican candidates know that if they want to run on a ticket with the president, they should be prepared to address Social Security reform. Moreover, the White House and some conservative activists believe that public attitudes may be changing. They cite the experience of roughly half a dozen Senate and a dozen House races in 2002, where Republicans won despite being challenged on their support for private accounts.

"Bush hasn't proposed or endorsed any specific plan, not even any of the three options laid out in December 2001 by a commission he hand-picked to help devise solutions. He will likely campaign only on a set of principles, much as he did in 2000. In this vacuum, others are rushing to lay down markers to help shape next year's debate. In November and December, prominent players and experts from both ends of the political spectrum introduced three new reform proposals.

"One proposal comes from Sen. Lindsey Graham, R-S.C., who during his 2002 campaign withstood Democratic attacks on his support of private Social Security accounts. His proposal, which has been lauded by business groups, builds on one of the plans outlined by the president's commission. It would allow workers under age 55 to put in an average of about 2.7 percentage points of their total 12.4 percent payroll tax into private accounts. The accounts would supplement Social Security benefits that under his plan would also be substantially smaller than those promised to retirees today.

"Meanwhile, several anti-tax groups, including the Club for Growth and Jack Kemp's Empower America, have begun rallying around an even more ambitious proposal, drafted by consultant Peter Ferrara, to let individuals divert an average of 6.4 percentage points of their 12.4 percent payroll tax—more than half—into private accounts. Ferrara's plan, touted in a Wall Street Journal editorial earlier this month, claims to offer workers benefits no lower than, and as much as two-thirds larger than currently promised Social Security benefits. Bigger accounts, supply-siders argue, mean more public support.

"Over the course of 75 years, the actuarial projections [from the Social Security Administration] suggest Graham's plan would actually reduce Social Security's cash needs by nearly half. … Graham's savings come essentially from a trade-off—those who choose private accounts would get lower rates of increase in their initial retirement benefits than what the current system promises.

"Democrats, meanwhile, show no inclination to propose plans of their own. 'We're willing to sit down with the president at any moment, but he needs to come up with a viable plan, and not just say he won't cut benefits and won't raise taxes,' said Rep. Robert Matsui, D-CA.

"Liberal academics have tried to fill the void on the left. In mid-December, Peter Diamond of the Massachusetts Institute of Technology and Peter Orszag, a former Clinton administration aide now at the Brookings Institution, unveiled a reform plan designed to restore the program's finances without changing its basic structure. It explicitly rejects diverting payroll taxes to private accounts, and it also rejects relying on additional infusions of cash from general revenues.

"Instead, the Diamond-Orszag plan focuses on making a philosophical and public policy case for retaining the basic, collectively financed structure of the program, and for essentially splitting the cost of reform between increased payroll taxes and gradual benefit reductions, with both changes targeting better-off retirees. … Under their plan, payroll taxes would rise slowly from 12.4 percent in 2005—split as it is today between employer and employee—to 14.2 percent in 2055. … Like the two conservative plans, this plan was found by the Social Security actuaries to achieve sustainable solvency for the foreseeable future."

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