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Social Security bill shows trade-offs

Plan would allow investment accounts but reduce benefits

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WASHINGTON — Offering a detailed look at what it may take to overhaul Social Security, two influential members of Congress have developed a proposal that would achieve President Bush's goal of creating investment accounts for all workers — but at the cost of substantial cuts in guaranteed benefits.

The proposal, to be introduced in the House, largely tracks the general approach set out by Bush when he established a commission this spring to develop a specific plan. The commission is just beginning its work.

While it is impossible to know what Bush's plan will look like, the new congressional plan is a window into the painful trade-offs the president and his commission will face. Its authors said they hoped that putting a detailed plan on the table would help Bush in his effort to transform Social Security, a goal that is among the most ambitious and politically divisive on the administration's agenda.

Since the presidential campaign, Bush has promoted the benefits of allowing workers to invest part of their payroll taxes in stocks and bonds. But he has avoided specifying how he will pay for the transition to the investment accounts or saying what other measures he will back to ensure that Social Security can pay promised benefits to the 76 million baby boomers after they retire.

The authors, Reps. Jim Kolbe, R-Ariz., and Charles Stenholm, D-Texas, are among the leading supporters of putting personal accounts at the heart of the overhaul effort.

But the two said personal accounts alone would not solve the problem. To pay for the accounts and to put the system on sound footing, they said they would propose reducing the guaranteed benefit, especially for middle- and upper-income workers, increasing the level of earnings subject to the Social Security payroll tax and reducing cost-of-living adjustments.

The plan would also accelerate the current schedule for raising the retirement age to 67 from 65, and it would reduce annual benefits further in line with any future increases in life expectancy.

The plan would also divert some tax revenues from Medicare, worsening the already weak financial condition of that program.

Kolbe and Stenholm said proceeds from investment accounts would at least make up for the cuts in the guaranteed benefit. Moreover, they said, the system would avert the certainty of even bigger benefit cuts and huge tax increases if nothing was done.

To offset some of the proposal's painful measures, the plan would provide benefit increases to low-income workers and would also match part of any money invested by people with low incomes in their personal accounts.

But even with the sweeteners, Kolbe and Stenholm said they knew their plan would attract intense criticism. Stenholm said he and Kolbe were like canaries being sent into a mine shaft, putting themselves on the line.

"If we survive, maybe others will venture into the subject," Stenholm said.

Most of the changes would be phased in so that they would not affect anyone now receiving retirement benefits or within a decade of retirement.

Critics of Bush's approach said the Kolbe-Stenholm bill showed that the administration would find it nearly impossible to come up with a politically acceptable plan that included private accounts — at least without relying heavily on general tax revenues to pay part of the bill, a step the White House has made clear it will be loath to take.

"The combination of the lack of general revenues and the diversion of financing into individual accounts creates unbearable pressure on the rest of the program," said Peter R. Orszag, a former Clinton administration economist who is an expert on Social Security. "What this plan illustrates is the difficulty of fashioning a politically viable Social Security reform proposal without using any non-Social Security revenue."

Charles P. Blahous, the staff director of the Bush commission, said the panel would look at every constructive proposal made by members of Congress or other people with an interest in the subject.

"The most important aspect of the Kolbe-Stenholm proposal is that it's a bipartisan collaboration, and we're trying to build a bipartisan atmosphere," Blahous said.

Social Security is taking in more through payroll taxes than it needs to pay benefits. But that situation will change rapidly starting in about 15 years as the bulk of Americans born from 1946 to 1964 move into retirement.

By 2016, under current projections, Social Security will need to start drawing on its holdings of government bonds to pay benefits. By 2038, the bonds will be exhausted, leaving the system capable of paying only about 72 percent of promised benefits.

Most Republicans in Congress support the idea of private accounts, but they have been reluctant to back any plan that requires benefit cuts or tax increases. Most Democrats — Stenholm is an exception — oppose private accounts, saying that they do nothing to solve the system's problems and introduce risk into what should be a guarantee against poverty in old age.

With the problem still years away, neither party has made a serious push so far to address the issue. Whether Bush has the clout to push a plan through Congress next year, a midterm election year, is the subject of much debate.

Kolbe and Stenholm have been pushing versions of their plan for several years but have generated little overt support in Congress. The significance of their bill lies less in its prospects for passage, which are slim, than in their willingness to prepare the public on Bush's behalf for the tough choices that were obscured when the issue was last aired, in the presidential campaign.

"We have to acknowledge that there isn't a fix to this problem that doesn't include spinach along with the ice cream," Kolbe said.