Reforming the program to ensure long-term solvency comes with a lot of unpopular options.

Washington Bureau Chief
FRITZ

WASHINGTON -- President Bush promises to reform Social Security without raising payroll taxes or cutting benefits for retired or near-elderly Americans. It sounds like a pledge you could take to the bank. But experts say Bush's statements so far raise more questions than they answer.
The still-unanswered questions include: Who qualifies as near-elderly? Would he consider a reduction in the annual cost-of-living raise to be a benefit cut? Would he support raising the official retirement age from 65 to 70?
As these questions suggest, there are some mighty unpopular options that likely will be considered by Bush, his hand-picked commission on Social Security reform and Congress as they try to draft a plan to ensure the long-term solvency of the 66-year-old retirement income program.
There is no such thing as a cost-free solution, warns Robert Bixby, executive director of the Concord Coalition, a bipartisan public interest group advocating fiscal responsibility. Trade-offs will always need to be made.
So far, says John Rother, chief AARP lobbyist, both Bush and the leadership of the commission have failed to focus on these tough questions, preferring instead to tout the benefits of the private investment accounts they hope to create as part of a new Social Security system.
The purpose of a commission is to prepare the American people for some sacrifices, Rother said. But just to the contrary, they are not talking about sacrifices. It makes you wonder how much they are committed to solving this problem.
Bush's Social Security commission, which has been asked to come up with a comprehensive reform proposal that the president can send to Congress, is laboring under a number of strict instructions from the White House. For example, he wants a proposal that does not change Social Security benefits for current retirees or near-retirees, one that does not increase payroll taxes for current workers and one that diverts some of the Social Security funds into voluntary personal investment accounts whose assets will belong to the individual.
Sounds simple, but so far nobody in Congress has been able to draft a bill that fits these criteria. And even those proposals that have come close to meeting the president's criteria, such as one introduced last week by Reps. Jim Kolbe, R-Ariz., and Charlie Stenholm, D-Texas, have elements that Bush and his advisers dislike.
The basic problem facing lawmakers and others involved in drafting a proposal is that personal investment accounts will take money out of the Social Security system, at least in the near term. Without some type of benefit cut or increase in revenues, therefore, they cannot solve the problem of the anticipated Social Security shortfall that will occur around 2030, when there will be too few workers contributing to support the burgeoning retiree population.
What follows is a description of the most controversial questions raised by the president's guidelines for reforming Social Security, and an assessment -- based on interviews with numerous legislative experts -- on how these issues might be resolved:

Payroll taxes

True to the president's wishes, neither the commission nor Bush's allies in Congress are thinking about increasing the rate at which earnings are taxed as contributions to the Social Security trust fund. But some proposals, such as the one by Kolbe and Stenholm, would raise the limit on the amount of payroll taxes subject to FICA deductions.
Last week, the White House rejected that idea. White House press secretary Ari Fleischer characterized it as a back-door tax increase, which the president will not accept.
Still, there are some experts who predict the final legislation will have to raise the limit on income subject to payroll taxes.
I suspect that will be part of the plan, Bixby said.
In addition, Rother notes that polls conducted by AARP consistently show that raising this limit is the single most popular item among the many potential changes being discussed for the Social Security system.

Cost of living

While promising to resist cutbacks in basic Social Security benefits, some members of the president's commission are advocating a cut in cost-of-living adjustments that raise the benefit level gradually each year in line with inflation.
One of the leading advocates of this idea is former Sen. Daniel Patrick Moynihan, who, as a respected Democrat and co-chairman of the commission, will have influence with Bush. Before he retired from Congress last year, Moynihan wrote a Social Security reform bill that provided for an immediate 1 percent cut in the cost-of-living formula.
Although many economists say the cost-of-living formula used by Social Security exceeds the true inflation rate, lobbyists for the elderly note that their costs often exceed those of other Americans. Social Security recipients depend more heavily upon prescription drugs, for which price increases are outstripping the inflation rate.
Moynihan thinks the commission can defend a cut in the annual cost-of-living adjustment on grounds that it is a technical change, not a cut in benefits. But critics of the idea note that this idea would hurt the oldest people on Social Security because, over the years, their benefits would fall further and further behind inflation.
If anyone ought to be protected it is those people in their 80s and 90s, Rother said.

Cutting future benefits

Proponents say individual investment accounts will offer Social Security beneficiaries a better return on their investment than the current system. They note that income from these accounts also goes to the retiree's heirs after death. Currently, heirs receive nothing from Social Security, even if the retiree dies at a young age.
Therefore, many economists say it would be only fair for the government to trim Social Security benefits to offset the increased income that retirees will receive from their individual investment accounts.
Such a change would affect future, not current retirees. If this were to be enacted, experts say, Bush could argue that it is consistent with his promise to preserve the current level of benefits to current retirees and that undefined group he calls the near elderly.
Observers say such a change in the Social Security program appears inevitable.
You'll note they (White House officials and commission members) have been careful not to eliminate that possibility, Bixby said. If they don't do this, they'll make the problem worse.

Raising retirement age

The official retirement age -- the age at which seniors can collect full Social Security benefits -- will rise from 65 to 66 in 2009. It is scheduled to rise again in 2020 to 67.
To save money, some experts are urging Congress to hasten the scheduled rise in the official retirement age and, perhaps, to raise it to 70. While this proposal would create enormous savings, Rother notes that polls show it to be the single most unpopular proposal under consideration.
Of course, such a change would not prohibit anyone from taking early retirement at age 62 with reduced Social Security benefits. But experts note the reduction in early retirement benefits under this plan would be much bigger than it is now.

Dipping into the Treasury