Bush Panel Outlines 3 Plans for Social Overhaul

By:  Richard W. Stevenson,
The New York Times, November 29th, 2001


President Bush's Social Security Commission set out three options today for allowing workers to establish individual investment accounts and acknowledged that the proposals would have to be accompanied by benefit cuts or other painful steps if the retirement system was to avert a long-term financial crisis.

Commission members said the proposals would be the centerpiece of the report they planned to submit to the White House next month. The commission had originally been expected to settle on a single private- account proposal that Mr. Bush would then try to persuade Congress to adopt as the basis for the most sweeping overhaul of Social Security in its 66-year history.

But Republicans in Congress, certain that Democrats are ready to attack them for cutting payments to future retirees, have grown wary of embracing any specific plan as they head toward the 2002 elections. And the 16-member commission has itself been divided over how best to modernize Social Security and prepare it for the financial strain that will accompany the retirement of the baby boom generation in the next several decades.

The three proposals would all allow but not require workers to invest part of their Social Security payroll taxes in stocks and bonds. In return, workers would give up some of their scheduled benefits.

One plan would do little to restore the retirement system's long-term fiscal stability, leaving it to Congress to decide on what further steps might be needed. The other two have additional benefit cuts that would put the system on sounder footing, although one would also rely on infusions of general government revenue or higher taxes on some workers.

In general, proponents of the plans said, workers would end up better off than if nothing was done to overhaul Social Security. Under current projections, Social Security will run short of money to pay promised benefits starting in 2038. After that point, the system would be able to pay about 72 percent of currently scheduled benefits.

It was less clear whether workers would end up better off relative to the benefits promised under current law. The answer would depend in part on how strong a return worker received on their investments.

The commission said that it was still working on some details, and that it might add other proposals before it completed its work in about two weeks. But the outlines released today showed for the first time the basic tradeoffs required in any move to give workers ownership of and control over part of their Social Security taxes.

"There's no painless way to do it, and no quick way to do it," said the commission's co-chairman, Richard D. Parsons, who is the co-chief operating officer of AOL Time Warner.

Opponents said the plans proved that moving to private accounts did nothing by itself to ensure the system's long-term health and would extract too big a price from future retirees by slashing a guaranteed benefit that they should be able to count on whatever the state of Wall Street.

"No matter how you approach it, individual accounts make it more difficult to meet the challenges Social Security faces in the future," said Representative Robert T. Matsui, a California Democrat who is a senior member of the Ways and Means Committee. "To pay for privatization, the commission is now proposing serious benefit cuts."

Under one option, workers would be able to invest up to two percentage points of the 6.2 percent payroll tax paid by individuals on earnings up to $80,400 (employers pay another 6.2 percent). For people who choose to participate, the current scheduled benefit would be reduced; otherwise, there would be no changes to the current system or benefits.

Under a second option, workers could invest as much as four percentage points of their payroll tax, up to a maximum of $1,000 per year.

Under that plan, initial benefits for most people would be reduced substantially by a change in the way they are calculated, with yearly increases in the initial payment determined not by the annual rate of wage growth, as under the current system, but by price inflation, which is typically lower. The plan would also improve benefits for low-income workers and widows.

Under the third option, contributions to the account would work much like a 401(k) program. Workers would contribute up to one percentage point of their earnings beyond their current payroll taxes, and that contribution would be matched with 2.5 percentage points of their payroll taxes, to a maximum of $1,000.

The third plan would also increase benefits for low-income workers and widows.

Mr. Parsons said there are a variety of ways to address Social Security's problems, each requiring its own balance of potentially painful tradeoffs, "and the right people to wrestle with those tradeoffs are our elected officials."

The recommendations came as Republicans including political strategists on Capitol Hill and at the White House have concluded that it would hurt the party's prospects in the 2002 Congressional elections to make an overhaul of the retirement system a major political issue now.

Mr. Bush is unlikely to be able to invest much time or political capital on the issue, given his focus on fighting terrorism, the strategists said. And they said a change in the system was harder to sell during a recession than during a period of prosperity.





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