Retirement rehab

The word leaking out of secret White House strategy meetings on Social Security reform is that President Bush is looking for a much larger privatization initiative than expected.

“They are really serious about doing this,” a key outside adviser who attended White House briefings on Mr. Bush’s emerging plan told me. It’s just sinking in to many of the president’s supporters and foes that he intends to use his political capital to tackle what no other president has dared do before: begin turning the New Deal-era retirement program into a self-financing private investment accounts system workers could own and control.

Since Mr. Bush’s re-election, White House officials have held nonstop meetings with top experts on Social Security reform from a bevy of conservative think tanks — such as the Cato Institute, the Heritage Foundation and the Hoover Institution — as well as business and industry leaders.

That Mr. Bush is making his reform plan a top priority in 2005 was no surprise to them (he repeatedly campaigned on the issue). What surprised many briefing participants was the bolder plan the White House is considering that could be twice the size of the modest 2 percent solution usually linked to the administration’s proposed reforms.

These outside advisers told me the White House is considering letting workers put up to 4 percent of their payroll taxes into stock or bond funds up to a certain still undecided income level.

This is one of three options offered by the president’s 2001 bipartisan commission on Social Security, whose reform proposals were temporarily shelved sometime after the September 11, 2001, terrorist attacks.

This is clearly a work in progress and no doubt will be changed before submission to Congress early next year. But the glimmers of a plan are coming into focus, administration advisers say. It will be similar to the federal employee retirement system that now lets workers invest in several stock, bond or fixed investment securities. In the beginning, there would be limited investment choices, three or more, all fully diversified, low-risk funds.

“Essentially, this would be a very low-cost, stripped-down basic account, much simpler than your average 401(k) system,” said one adviser.

But the really big question is how to fund the transition costs. The larger the amount workers are allowed to divert into private accounts, the more money that will draw out of Social Security that will have to be made up through general revenue, loans or taxes.

Privatization advocates among the policy institutes and business coalition groups advising the White House opposed offsetting the costs by raising the income cap on payroll taxes. They want the transition costs to come out of general revenues by cutting wasteful or low-priority programs.

But South Carolina Republican Sen. Lindsey Graham, who has taken the Senate lead on Social Security reform, wants to raise the current $87,000 income limit to $150,000 to offset the costs. Mr. Bush, he told me, will have to accept “nontraditional Republican concepts to solve this problem.”

Crafting and steering a reform plan through these competing forces will not be easy, especially without a major figure to oversee the entire effort. The White House hoped Stanford University economist John Cogan, a senior fellow at Hoover who served on the reform commission, would take that job, but he has turned it down, citing family responsibilities. Still, Mr. Cogan is part of the administration’s “brain trust” on this issue and will play a significant role in shaping the final product.

Mr. Cogan’s advice to senior White House officials is to move swiftly on a bill early next year while the president has the political momentum from his 2004 victory.

He cautions that, in crafting the reform, “you don’t have to necessarily start out big. It can be done on a gradual basis, with a long lead time, but you want to get started right away so individuals can benefit from the power of compound interest.”

Even if the final legislation falls short of what the administration seeks, Mr. Cogan says the White House should operate with confidence about the longer-term effect of even a modest step toward personal Social Security investment accounts.

Story Continues →