Tapping Surplus in Social Security Draws Skepticism

House Republicans introduced a bill Wednesday to use annual surpluses in the Social Security system to finance individual investment accounts for workers, but Democrats and budget analysts said the proposal would blow at least a $600-billion hole in the federal budget.

Republicans on the House Ways and Means Committee fleshed out the idea, proposed last week by Sen. Jim DeMint (R-S.C.), to carve up the Social Security surplus into investment accounts for workers under age 55.

That surplus is now invested by the Social Security Administration in government bonds, and the Treasury Department uses proceeds from the bonds to pay for government programs.

Many members of Congress said their constituents regarded this practice as equivalent to stealing from their retirement money to pay for highway construction and farm subsidies. That gives supporters of the bill hope that the proposal will have enough political appeal not only to unite Republicans but to attract a few Democrats, who have been unified in refusing to consider the accounts.

However, so far there is no sign of Democratic support. And an important Republican, House Ways and Means Committee Chairman Bill Thomas of Bakersfield, welcomed the new bill in a way that made its future seem less than rosy.

“This proposal will likely form the basis for one of the components of a developing retirement security package,” said Thomas, who would probably be lead author of any Social Security legislation that the House voted on this year. Thomas has said he would like a single far-reaching bill to overhaul the Social Security, pension and tax systems.

Democrats criticized the latest GOP bill as proof that Republicans were interested not in guaranteeing the long-term solvency of Social Security but in substituting risky investment accounts for today’s guaranteed retirement benefit.

“This shows that Republicans want privatizing at all costs,” said Rep. Earl Pomeroy (D-N.D.), a Ways and Means Committee member.

Some Republican supporters of individual accounts criticized the new bill as doing nothing to shore up Social Security’s finances with either benefit cuts or tax increases.

“You must eat your spinach before having dessert,” said Rep. Jim Kolbe (R-Ariz.), author of a wide-ranging Social Security bill, “and this plan only offers dessert -- the personal retirement accounts.”

Sen. Charles E. Grassley (R-Iowa), who as Finance Committee chairman is responsible for Social Security legislation in the Senate, said he, too, was disappointed that the bill did not address Social Security’s impending insolvency, projected to occur in 2041. He said he hoped that no member would offer the bill in committee, “at least until I come to the conclusion that nothing more can be done.”

Authors of the new plan are Reps. Jim McCrery (R-La.), chairman of the Ways and Means subcommittee on Social Security, and Sam Johnson (R-Texas), Paul Ryan (R-Wis.) and E. Clay Shaw Jr. (R-Fla.), all Ways and Means members.

In 2007 and 2008, the first two years the plan would be in effect, workers who opened individual accounts would have to invest the money given to them in Treasury securities, just as the money is invested now by the government. Starting in 2009, investors could choose among other “prudent investment options” recommended by an independent government board.

Workers who opted to open the accounts would see a reduction in their traditional Social Security benefits.

Democrats scoffed at the Republican plan. “This is the same crowd that spent all the Social Security surplus in the first place,” Pomeroy said. “We do need to stop spending the Social Security surplus, but by balancing the budget.”

Democrats and many analysts argued that turning over Social Security surpluses to individual investment accounts would require the government to borrow an equal amount from the private sector to pay for its operations. Social Security is expected to accumulate about $1 trillion more in payroll taxes than it spends in benefits until about 2017. At that point, the system is expected to be paying out more in benefits than it takes in each year as the baby boom generation moves into retirement.

Jason Furman, a senior fellow at the Center for Budget and Policy Priorities, estimated that two-thirds of workers would establish their own investment accounts, at a cost to the government of about $600 billion over the 10-year period of Social Security surpluses. If all workers participated, he said, the cost would be about $1 trillion.

The federal deficit in 2007, the first year of the individual accounts, would be $476 billion under the Republican plan, compared with $412 billion under current policies, Furman said.

Robert Bixby, executive director of the Concord Coalition, which lobbies for balanced budgets, said he couldn’t imagine that sponsors of individual accounts would let them wither and die after 10 years.

“Otherwise,” he said, “it would be like having a plan to get an airplane in the air but having no plan to land it.”