Social Security reform deserves highest priority

WASHINGTON – 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 anyone expected.

"They are really serious about doing this," a key outside adviser who has attended White House briefings on 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 to do before: begin turning the New Deal-era retirement program into a self-financing private investment accounts system that workers could own and control.

Since Bush's re-election, White House officials have been holding a nonstop series of 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 Bush is making his reform plan a top priority in 2005 came as no surprise to them (he's repeatedly campaigned on the issue). What was surprising to many briefing participants was the bolder plan the White House is considering that could be as much as 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 as much as 4 percent of their payroll taxes into stock or bond funds up to a certain income level, as yet undecided.

This is one of three options offered by the president's 2001 bipartisan commission on Social Security, whose reform proposals went on the shelf temporarily sometime after the Sept. 11 terrorist attacks.

This is clearly a work in progress and the administration no doubt will make changes before the plan is ready to go to Congress early next year, but the glimmers of a plan are coming into focus, according to administration advisers.

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 they would have a limited number of investment choices, three or more, all of them 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 awaiting an answer is how to pay for the transition costs. The greater the amount the government allows workers to divert into private accounts, the more money that will draw out of Social Security that the government would have to make up through general revenue, loans or taxes.

Privatization advocates among the think tanks and business coalition groups advising the White House oppose offsetting the costs by increasing 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 lead in the Senate on Social Security reform, wants to increase the current $87,000 income limit to $150,000 to offset the costs. Bush, he told me, is going to have to accept "non-traditional 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 had hoped that 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, Cogan is part of the administration's "brain trust" on this issue and will play a significant role in shaping the final product.

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.

Even if the ultimate legislation falls short of what the administration will seek, the White House, Cogan says, should operate from a position of confidence about the longer-term impact of even a modest step toward personal Social Security investment accounts.

"Once people find out how much they can earn (from these accounts), they will demand that they be allowed to put more money into it," Cogan told me.