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Published: 1/9/2005

Administration slowly reaching for the 3rd rail

BY ANN McFEATTERS
BLADE WASHINGTON BUREAU CHIEF

WASHINGTON - Bush administration officials learned this past week their work is cut out for them on overhauling the 70-year-old Social Security system when comedian Jay Leno responded to a trial balloon the White House released.

The administration leaked word it is thinking of reforming Social Security for future retirees. One assumption is that some amount of retirement investment would be paid into stock market accounts, which traditionally rise faster than government bonds.

Mr. Leno, who like other late night TV talk-show hosts is often a political barometer, joked: "The Bush administration is proposing a change to the Social Security system. The new program is called 'Good luck, grandma, You're on your own. You've fallen and you can't get up.' "

The White House quickly put out the word President Bush will not lay out a specific solution until he is convinced more Americans accept the argument that broad scale changes are needed in what has long been called the third rail of American politics. (Like the middle rail that brings power to subway trains, if you touch it, you die.) The White House has polls that show that young workers support the idea of partially privatizing Social Security; older workers are skeptical.

With the nation split over the wisdom of giving younger workers a choice of partly opting out of traditional Social Security to set up their own retirement account, Mr. Bush also faces a split in his own party.

At closed door meetings last week, administration officials were warned that any plan must have bipartisan support or Republican lawmakers voting to change Social Security could lose en masse at the polls. The officials promised that Mr. Bush is committed to selling the American people on changing Social Security with a campaign-style tour so Republicans don't get burned.

But Republicans are in sharp disagreement over what Bush's plan should be. Some conservatives oppose changing the benefit structure and want privatization; others want a mix of options. Other Republicans are worried about the cost of borrowing up to $2 trillion to set up a partial privatizing of Social Security by letting workers take out up to $1,300 a year from their share of payroll taxes to invest.

Mr. Bush's 2001 Commission to Strengthen Social Security proposed not to do anything to affect benefits for those 58 and older who are on the pay-as-you-go system but said that younger workers would gradually be switched to a pre-funded system because in the future there won't be enough workers to support all the retirees to ever-higher standards of living. Fifty years ago, there were eight workers supporting one beneficiary; in 10 years, it will be fewer than three workers per beneficiary.

This past week, the White House made clear Mr. Bush is dead serious about making the biggest changes in Social Security since Franklin Roosevelt signed it into law in 1935. At the same time officials were insisting Mr. Bush is not quite ready to get into specifics, a White House memo to Republicans was leaked warning that Social Security benefits must be cut.

The memo says: "If we borrow $1-2 trillion to cover transition costs for personal savings accounts and make no changes to wage indexing, we will have borrowed trillions and will still confront more than $10 trillion in unfunded liabilities. This could easily cause an economic chain reaction: the markets go south, interest rates go up, and the economy stalls out."

Mr. Bush told new members of Congress that changing Social Security is essential. There are 47 million Americans on Social Security, getting $471 billion a year. Growth in the system without changes is not sustainable, he says.

Mr. Bush told the lawmakers to keep "an open mind." He added, "Seniors have nothing to fear when they hear talk about reforming the Social Security system. Every senior in America will get their check. And the fundamental question is do we have the will necessary to make sure the Social Security system is sound and available for future generations of Americans, for younger generations of Americans. I'm going to call upon Congress to take this issue on, and I look forward to working with you to modernize the system."

Mr. Bush pointedly did not say how much every senior's check would be.

With all the commotion over changing the nation's retirement security system, there are three major questions: Is there a crisis that requires action? If so, what would be the effect of the most likely fixes? Is anything likely to pass?

Twenty-five percent of Americans believe there is a crisis, and another 49 percent say Social Security has major problems, according to a new nationwide poll for ABC News and the Washington Post. The National Association of Manufacturers this week agreed with the White House that a crisis is brewing because there will be a $10.4 trillion shortfall without changes. NAM called for "modernization" by adopting Mr. Bush's plan to permit some younger workers to invest some of their payroll taxes.

But the nation's largest business group, the Chamber of Commerce, this past week urged President Bush to move cautiously. Noting that there is already a lot on the congressional to-do list, Tom Donohue, president of the U.S. Chamber of Commerce, said, "We'd like them to address the low-hanging fruit that's already keyed up," such as passing an energy bill and limiting the public's ability to file medical malpractice and class-action lawsuits. "A mandate lasts about 15 minutes in this town," Mr. Donohue said.

Labor unions and AARP, a lobbying group for those 50 and older, are adamant that by the accounting of the Social Security trustees, there is no serious crisis until 2042, except for a short term problem when baby boomers retire. After that, they insist, the program will balance out.

Roger Hickey, co-director for America's Future, a coalition of groups opposing big changes, contends Republicans are manufacturing a crisis in order to give Wall Street millions of dollars in new investment money and administrative fees. He said Bush is falsely claiming a mandate from the election to privatize Social Security. "My prediction is this won't pass," Mr. Hickey said.

John Sweeney, president of the AFL-CIO, agrees, insisting privatization is "just another public relations gimmick" to put a windfall of a trillion dollars into the financial services industry.

Sen. Harry Reid (D., Nev.), the new Senate Democratic leader, said he is totally opposed to Mr. Bush's plan, insisting Wall Street commissions inevitably will come out of retirees' benefits. The counter argument to that is that no plans or rules have been written yet, so that commissions could be forbidden.

AARP has begun an ad campaign contending that "winners and losers are stock market terms. Do you really want them to become retirement terms?" The ad argues, "Let's not turn Social Security into Social Insecurity. While the program needs to be strengthened, private accounts that take money out of Social security are not the answer and will hurt all generations."

AARP President William Novelli said any privatization of Social Security would be too risky for workers and "hugely expensive and unnecessary" for the nation. His group is powerful because seniors vote in greater percentages than other voters.

Julian Bond, representing the NAACP, the nation's oldest civil rights group, opposes change because for one in three African Americans over 65 Social Security is the only source of income. Cutting benefits is inconceivable, he says.

Kim Gandy, president of the National Organization for Women, says that without Social Security benefits, elderly women again would be poor in overwhelming numbers because most women earn less than $25,000 a year and are less likely than men to have pensions. She says Bush will argue "the sky is falling" long enough that people will think Social Security is "broken." It just needs "strengthening," she said.

William Spriggs, senior fellow at the Economic Policy Institute, which argues that there is no Social Security crisis, notes FICA stands for Federal Insurance Contributions Act. "It's not a federal retirement program. It is an insurance program. Unless the president tells you how he'll raise revenues, and he can't, he is going to cut your benefits. There is no crisis. We have enough money for 50 years to pay 75 percent of benefits. There is no need to rush into this. We have plenty of time to come up with a rational approach. For starters, we could not make the tax cuts permanent (as Bush proposes to do) and keep benefits levels rising."

Douglas Holtz-Eakin, who holds the traditionally non-partisan job of director of the Congressional Budget Office, said the explosive growth of Medicare is a much bigger problem than Social Security, which, he said, faces no immediate crisis. But that does not mean something must not be done, he warned. He said that 13 years from now - in 2018 - money paid out in Social Security benefits will exceed the money coming in. Because the Social Security trust fund is a mirage - the money in it has been spent by the federal government for other purposes - that could grow into a crisis then that is best fixed now, he said.

He notes that some forget that under the law, if Social Security goes broke, benefits are cut by one-fourth for everyone across the board.

Mr. Holtz-Eakin says Americans face an essentially simple policy decision. Do Americans want future retirees to have an increasingly better standard of living, which is what happens now as benefits are indexed to wages? If so, are they willing to raise taxes to do that? Or do they want to keep retirees' benefits roughly at current levels and let them use some of their FICA taxes to set up private accounts to try to make more than they'd otherwise get?

The risk is that if private accounts didn't always work, Social Security benefits would replace only 22 percent of a retiree's former income, down from 42 percent now. Says Mr. Spriggs, "If you retire in 2055, you don't want the lifestyle you had in 2005. You want a better one."

The actuarial argument is that despite some clearly bad periods, such as the Depression and the 2002 market downturn, the stock market has gone up an average of 10 percent a year in the nation's history before inflation, while money invested in Social Security in government bonds has gone up 1.8 percent after inflation. Even if workers invested part of their money in stocks and part of their money in mutual funds, the argument is that the nation as a whole would do better than it does now.

But Mr. Bush's critics note that Social Security benefits are not just for retirees but for the disabled and for children under the age of 18 whose parents die. The administration has yet to explain how they would be protected.

With the nation split almost 50-50 over the wisdom of giving younger workers a choice of partly opting out of traditional Social Security to set up their own retirement account, Mr. Bush also faces a split in his own party.

At closed door meetings this week, administration officials were warned that any plan must be have bipartisan support or Republican lawmakers voting to change Social Security could lose en masse at the polls. The officials promised that Mr. Bush is committed to selling the American people on changing Social Security with a campaign-style tour so Republicans don't get burned.

But Republicans are in sharp disagreement over what Bush's plan should be. Some conservatives oppose changing the benefit structure and want privatization; others want a mix of options. Other Republicans are worried about the cost of borrowing up to $2 trillion to set up a partial privatizing of Social Security by letting workers take out up to $1,300 a year from their share of payroll taxes to invest.

If Congress had to vote right now, nothing would change. But this year is crucial. Mr. Bush has staked his reputation on a national debate to convince Americans they would be better off changing Social Security than doing nothing. He is counting on his ability to convince enough Americans that he is right to make it safe for Republicans and a few Democrats to vote for change.

George Kourpias, who heads the Alliance for Retired Americans, says preventing even partial privatization of Social Security this year "will be the fight of our lives. We have to educate young people that Social Security will be there for them."

But right now, polls show that young people do not believe that.

Contact Ann McFeatters at: amcfeatters@nationalpress.com or 202-662-7071.



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