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Two Paths to Social Security Investment Accounts Mapped

Times Staff Writer

With President Bush’s State of the Union address three days away, two factions are competing for the president’s support for their approaches to diverting a portion of Social Security payroll taxes into private investment accounts.

The more cautious side is urging relatively small private accounts accompanied by benefit cuts designed to ensure the retirement system’s solvency.

The other faction is advocating larger investment accounts and smaller, if any, benefit cuts.

Bush has referred favorably to a plan drawn up by his 2001 Social Security commission that closely tracks with what the cautious advocates are pushing.

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But the supporters of even greater privatization say Bush may be tilting their way.

Rep. Paul Ryan (R-Wis.), author of the legislative proposal that would establish the largest private accounts, said the White House “realizes that a half measure will be just as bitterly opposed as a full measure. If you do small accounts, you just kick the can down the road for another Congress to fix.”

Ryan, who said he had spoken directly with Bush twice at the end of last week about Social Security, said he expected the president to offer a detailed plan in his State of the Union address to a joint session of Congress on Wednesday night.

“I think he’s going to put a lot of flesh on the bones,” Ryan said. “We definitely have a receptive audience.”

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David C. John, an economist at the Heritage Foundation, which has urged smaller accounts accompanied by a slowdown in the growth of benefits, said different participants in the policy debate had different emphases but not different goals.

“I don’t see this as a case where we have different sides competing for the president’s ear,” John said. “The president has been very good at listening to everyone, and he will make up his own mind.”

The plan developed by a commission Bush appointed in 2001 calls for feeding private accounts with about one-third of workers’ 12.4% Social Security payroll taxes, to a maximum of $1,000 a year.

Peter Ferrara, who wrote a book on Social Security restructuring in 1980, said it was his understanding that the White House was not wedded to the Social Security commission’s plan. “Everything is open,” said Ferrara, now a senior fellow at the Institute for Policy Innovation and a policy advisor to the Free Enterprise Fund. He advocates maximum funding for private investment accounts.

The private accounts in the commission’s proposal could be enlarged by raising the maximum amount workers could invest. Ryan’s plan, based closely on Ferrara’s approach, includes a diversion of 10% of the first $10,000 of income and 5% of additional income up to the cap (now $90,000) on wages subject to the payroll tax. Typical workers would be able to put more than half of their Social Security payroll tax -- 6.4 percentage points -- into the private accounts.

Grover Norquist, president of Americans for Tax Reform, said he tended to think that White House policy makers “are drifting toward larger accounts.”

The White House is publicly silent about its plans, and outsiders whom the White House consults are careful not to break confidence. “If you talk to the White House, you don’t talk about it,” Norquist said.

But Congress, Norquist said, will calculate that if small private accounts are good, larger ones are better. “It’s the natural resting point for the politics of this,” he said.

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The White House has seemed less open, however, to a package that would fund private accounts without cutting Social Security benefits. Social Security’s trustees estimate that, with the retirement of the baby boom generation, annual benefit payouts will overtake payroll tax revenue in 2018 and that the program’s fund will run dry in 2042.

Bush has said repeatedly that any Social Security plan must guarantee the program’s solvency, and he has ruled out tax increases -- which points to reductions in promised benefits.

Bush’s Social Security commission would trim benefit growth by basing initial benefits on each worker’s wage history as adjusted for rising prices rather than wages, as is now done.

Because wages have risen an average of 1 percentage point a year faster than prices, this change, when fully phased in around the middle of the century, would slash benefits by nearly half from those promised by current law. Although benefits would still keep up with price inflation, they would grow progressively smaller as a percentage of wages earned when retirees were working.

This feature of the commission’s plan has drawn almost as much criticism from Democrats as the private accounts.

Steve Moore, president of the Free Enterprise Fund, said the White House had gone “back to the drawing board” after some aspects of the commission’s proposal received bad public reviews.

“I’m telling them not to cut benefits, that’s a bad idea,” Ferrara said. “The president campaigned on personal retirement accounts, not on cutting future personal benefits.”

Moore said he was told that the White House was open at least to moderating the commission’s proposal by using a combination of changing wages and prices to calculate initial Social Security benefits, at least for low-income retirees.

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“Progressive indexing,” as this approach is sometimes known, was among the options still under discussion, said Derrick A. Max, executive director of the Alliance for Worker Retirement Security, an offshoot of the National Assn. of Manufacturers.

But Moore said some benefit cuts were necessary if restructuring was to get crucial support from Wall Street and, in particular, from Federal Reserve Chairman Alan Greenspan.

And John of the Heritage Foundation said, “We think the growth in benefits needs to be slowed one way or another, whether by indexation or some other means.”

Rep. Ryan argued that benefit cuts would be rendered unnecessary by a combination of across-the-board government spending caps and the tax revenue from the economic activity generated by investments through the private Social Security accounts. The important thing, he said, is to get the accounts started.

Otherwise, said Ryan, who turned 35 on Saturday, Social Security will pay him less than 75% of the benefits now promised when he reaches full retirement age in 32 years.

John said that no matter what Bush says in his State of the Union address, the advocates of private Social Security accounts have come a long way in a short time.


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