WASHINGTON — In restructuring Social Security, President Bush has not one goal, but two.
And as the debate begins over transforming the giant public pension program for the elderly, one of the critical questions facing the White House is whether the two goals will complement or undermine each other.
So far, most of the attention has focused on the president’s push to divert part of the Social Security payroll tax into private accounts that individuals could invest in stocks or bonds — a plan Bush is expected to promote today.
But White House officials signal that he’s also likely to propose reductions in the growth of Social Security benefits meant to close the imbalance between the system’s long-term revenue and obligations.
White House officials believe these two goals will reinforce each other, arguing that the public and Congress will accept reductions in benefits only if that move is linked to the promise of personal accounts that could offset some of the cuts.
But many conservative leaders, including former GOP vice presidential nominee Jack Kemp and former House Speaker Newt Gingrich (R-Ga.), warn that the benefit cuts could generate so much resistance that they would doom the personal accounts.
Increasingly, it appears Bush also could face the opposite risk: that the personal accounts could erode support for the benefit reductions.
The reason is that the deficit hawks in both parties who are most willing to risk cuts in the growth of Social Security benefits are the most resistant to the massive government borrowing the administration is considering to fund personal accounts.
Yet if Bush were to try reducing such borrowing by raising taxes, he risks alienating the conservatives most enthusiastic about creating the personal accounts in the first place.
These complex considerations underscore the challenge Bush faces as he tries to design a restructuring plan that can win a majority in the conservative-dominated House and enough Democratic support to reach the 60-vote threshold needed to break a filibuster in the Senate.
“You’re driving into a fairly narrow fairway,” said Rep. Mike Pence (R-Ind.).
Bush’s two goals in restructuring Social Security are related but distinct. The private accounts aim to advance an “ownership society” by encouraging more workers to invest in stocks and bonds.
Slowing the growth of benefits is designed to close the long-term gap in the system’s financing. Largely because life spans are lengthening and the number of workers per retiree is shrinking, the Social Security Administration estimates that benefits guaranteed to seniors over the next 75 years will exceed the system’s revenue by $3.7 trillion.
That shortfall eventually could force benefit reductions, or tax increases, or both.
Bush wants to pursue his first goal by allowing workers to divert part of the 6.2% they now pay in Social Security payroll taxes into private investment accounts. That idea could allow workers to accumulate substantial wealth for retirement. But by itself, it does nothing to solve the Social Security financing gap. Indeed, it would intensify the system’s near-term financial pressure.
Because payroll taxes from today’s workers are used to finance the benefits for today’s retirees, Washington would have to borrow as much as $2 trillion over the next decade to replace the money that would be diverted to personal accounts.
Administration officials have floated the idea of closing Social Security’s long-term funding gap by shifting the way initial Social Security benefits are calculated. Today, those benefits are adjusted upward to reflect overall growth in wages; the change would link initial benefits to prices, which usually grow more slowly.
Benefits would still grow, but not nearly as much as under the current system. And workers who chose to establish investment accounts would face further cuts in their guaranteed benefit.
The administration and some of its key allies believe the only way to pass Bush’s two initiatives is to couple them. Voters, they believe, are much more likely to accept reductions in guaranteed Social Security benefits if they are simultaneously provided an investment account that generates earnings to offset some or all of the loss.
And the bond markets, they argue, are less likely to revolt against new borrowing to fund the individual accounts if Washington adopts a plan to eliminate Social Security’s long-term shortfall.
Linking the ideas won’t sway liberal Democrats because they dislike both of them. They believe Bush’s proposals would leave seniors too exposed to market fluctuation for their retirement.
Almost all conservative Republicans want to establish private accounts. David C. John, an analyst at the conservative Heritage Foundation, believes that most Republican legislators will accept a package of benefit cuts and private accounts once Bush proposes a specific plan.
But some conservative activists and legislators worry that benefit reductions, an idea certain to inspire intense opposition, will drag down the investment accounts they consider a higher priority.
Kemp, a longtime leader of the party’s tax-cutting wing, wrote last month, “Any personal-accounts reform plan put forth now that involves benefit cuts or tax increases will be dead on arrival on Capitol Hill.”
Gingrich, who is floating a possible 2008 GOP presidential bid, is making similar arguments.
Conservatives from this school insist that if the personal accounts are large enough, they will produce enough revenue for workers to guarantee them at least as large a Social Security benefit as promised under current law, while allowing government to cut its own expenditures enough to eliminate the long-term shortfall.
That perspective has been embodied in a reform plan introduced by Rep. Paul Ryan (R-Wis.) and Sen. John E. Sununu (R-N.H.) that says government should guarantee workers no less than their promised benefits, even if their investments turn sour.
But many analysts consider those proposals an unrealistic “free lunch” that will require crushing levels of government borrowing and further weaken Social Security’s finances.
“If you just did the personal accounts … you would accelerate the insolvency date” for Social Security, said one White House official who asked not to be identified.
Bush faces the opposite problems with lawmakers in both parties concerned about long-term federal budget deficits and the risk that spending on entitlement programs for the elderly will steadily squeeze out funding for other social needs as baby boomers retire.
These legislators may be the most willing to consider long-term reductions in Social Security spending. But these same deficit hawks may be among those most opposed to adding trillions of dollars to the national debt to fund the individual accounts.
An indication of this opposition came when the Concord Coalition, a centrist group committed to deficit reduction, paid for a full-page newspaper ad in Sunday’s New York Times insisting that any Social Security reform avoid increasing the national debt. To overcome those concerns, Sen. Lindsey Graham (R-S.C.) has proposed funding part of the transition cost for personal accounts by raising Social Security taxes.
Today, workers pay payroll taxes on their first $90,000 in earnings; Graham says he would raise that limit to perhaps $200,000 — a change that he maintains would severely reduce the amount of borrowing required to create personal accounts.
“There are a lot of centrist Democrats who will cross the Rubicon, I think, about personal investment accounts if we can do it in a way that deals with the deficit,” he said.
But raising taxes to fund Social Security reform is anathema to most conservatives.
Although Bush has been careful not to reject Graham’s idea, several officials familiar with White House thinking said they doubted that he would embrace it — or that many Democrats would accept individual accounts even if he did.
Given these cross-pressures, “It is tough to get everybody on the same page, no doubt about it,” said Michael Tanner, a policy analyst at the libertarian Cato Institute and a leading advocate of individual accounts.
But he added: “At least you’ve got a majority of people talking about making reforms, which you didn’t have in the past.”