Social Security Battle Likely

Two groups of prominent Democratic centrists plan to oppose the centerpiece of President Bush’s proposal to restructure Social Security, potentially dimming administration hopes of building bipartisan support for its top domestic priority.

The Democratic Leadership Council, the party’s leading centrist organization, and Third Way, a new group working with moderate Senate Democrats, expect to issue statements soon opposing Bush’s push to divert part of the Social Security payroll tax into accounts that individuals could invest in the stock market, officials of the groups say.

The opposition is significant because both groups have aggressively argued that Democrats should not flatly resist changes to Social Security. Also, in the past some of the leading officials associated with the Democratic Leadership Council have backed the type of private investment accounts Bush is promoting.

But several factors -- including the bitter political divisions on Capitol Hill, the stock market’s mixed performance in recent years and the reemergence of large federal budget deficits -- have reduced the number of Democratic centrists open to the idea.

Reflecting that is the impending move by the leadership council and Third Way to join Democratic liberals in arguing that Bush’s restructuring plan would exacerbate, rather than alleviate, Social Security’s long-term financing problems.

“We will probably come out for a modernization program for Social Security, but it will not be the Bush program,” said Al From, the leadership council’s founder.

With the GOP holding 55 seats in the new Senate, any Social Security restructuring plan would need votes from at least five Democrats to break an anticipated filibuster. Key Republicans expressed confidence that they could attract some moderate Senate Democrats to support a plan that included private accounts funded through the existing payroll tax.

“I’m increasingly optimistic ... that there is going to be a give and take that will lead to real bipartisanship,” said Sen. Lindsey Graham (R-S.C.), who is pursuing Democratic support for his own restructuring proposal.

Yet Democratic liberals see resistance from the leadership council and Third Way as signs that the party is consolidating against the private account idea.

“My own view is the tide is beginning to shift away from private accounts,” said Bill Samuel, the AFL-CIO’s legislative director. “I think this is going to be seen more and more as an ideological battle, and the centrists are going to feel much more comfortable returning home to the mainstream of the [Democratic] party.”

Most Democrats have consistently opposed measures to divert part of the 12.4% payroll tax into private accounts that individuals could invest. Their worry has been that such a diversion would increase the pressure for long-term reductions in guaranteed Social Security benefits and leave workers more exposed to the risks of the stock market.

Instead, Democrats have generally echoed former President Clinton in endorsing add-on investment accounts that would provide workers with government subsidies to invest for retirement, but not divert -- or carve out -- existing payroll tax revenue for that purpose.

That’s the alternative the leadership council and the Third Way group are likely to propose. The idea has almost no support among Republicans, who argue that it does not address Social Security’s long-term funding problems and creates an expensive entitlement in the form of subsidized retirement savings.

Only a few years ago, several prominent Democratic centrists joined Republicans in supporting plans to shift part of the payroll tax into private investment accounts. In 1999, Democratic Sens. Bob Kerrey of Nebraska, John B. Breaux of Louisiana and Charles S. Robb of Virginia co-sponsored such a proposal. The late Sen. Daniel Patrick Moynihan (D-N.Y.) also embraced the idea.

Although the Democratic Leadership Council never officially endorsed such carve-out accounts, Will Marshall, president of the Progressive Policy Institute, a think tank affiliated with the group, did so in a 1999 article in the council’s policy journal. “By diverting even a small portion of the payroll tax into personal retirement accounts, we could make stock ownership a near-universal experience,” he wrote.

But support for the idea among centrist Democrats appears to have receded. One major reason seems to be the intensifying ideological conflict between the parties, which has reduced the appetite for bipartisan cooperation on most issues.

“There is absolutely no trust among Democrats that you could cooperate with Republicans ... and not be taken to the cleaners,” said Marshall, who remains more open to carve-out accounts than other leadership council officials.

Also dampening Democratic interest in Bush’s proposal has been the stock market’s decline since 2000, which to many has underscored the risks of increasing retirees’ dependence on investment accounts.

“I think carve-out accounts are a very difficult way to start a reform,” said the council’s From. “There are too many people afraid of what will happen in the market.”

Additionally, the return of large budget deficits under Bush has eliminated the projected surpluses that reform supporters envisioned could fund the transition cost of establishing the personal investment accounts while maintaining existing benefits for those at or near retirement.

Centrist Democrats express concern that Bush will call for borrowing trillions of dollars over the next 20 years to fund the investment accounts.

“The fiscal choices the administration has made in the first term make it very hard to have a serious debate about Social Security,” said Bruce Reed, the leadership council’s president and Clinton’s former chief domestic policy advisor.

But the same tough financing question could face centrist Democrats promoting the add-on accounts as an alternative to Bush’s plan. With the surplus gone, there’s no ready source of money to fund such accounts, either.

Most congressional Democratic moderates have not preemptively rejected Bush’s call for private accounts. Democratic Sens. Joe Lieberman of Connecticut, Evan Bayh of Indiana and Thomas R. Carper of Delaware refused to rule out the idea in recent interviews.

“For now, we should leave things on the table and have a debate about them,” Carper said.

Lieberman and Sen. Olympia J. Snowe (R-Maine) are leading a group of moderates from both parties that have begun efforts to determine whether they can reach a consensus position on Social Security reform.

Still, many of the Democratic centrists are signaling that they might support private accounts only with conditions Republicans likely would find difficult to accept.

Bayh said he would consider a private account plan only if it could “maintain the safety net, maintain progressivity [in benefits] and protect the taxpayers [from more debt.].”

Graham, the South Carolina Republican, hopes to attract support from Democratic moderates through his plan to pay for individual accounts partly by imposing Social Security taxes on earnings up to $200,000 a year, compared with $90,000 now. That would require much less borrowing than most private account plans.

“I believe if we can come up with a financing plan regarding the transition cost that is sensitive to the deficit, we will soon establish a beachhead of bipartisanship,” Graham said.

Times staff writer Janet Hook contributed to this report.