CHN: Social Security Pro-Privatization Forces Divided on Strategy

After months of debate and public events, Republicans in Congress are still trying to write Social Security legislation. In the Senate, Charles Grassley (R-IA), Chairman of the Finance Committee, wants to produce a bill before the August recess, but at this time a majority of his committee do not support legislation that creates private accounts.
Finance Committee members Sen. Olympia Snowe (ME) opposes private accounts as described by the President, and her colleague Sen. Craig Thomas (R-WY) opposes the President’s proposal on fiscal grounds. All of the Democrats on the committee are united in opposition. As a result, Grassley has begun to negotiate proposals that would improve the program’s solvency, while leaving the more explosive issue of private accounts for later.

Some measures being considered include raising the amount of income that can be taxed under Social Security, reducing benefits for wealthier recipients, and raising the retirement age. Conservative Republicans are hostile to raising the amount of income taxed, while raising the retirement age is criticized by experts who say it would unfairly hurt people in strenuous physical labor occupations or people who find it difficult to obtain employment in old age.

Meanwhile, a very different strategy is being implemented in the House. Rep. Bill Thomas (R-CA), chairman of the Ways and Means Committee, is considering attaching a raft of tax provisions related to retirement savings and other “sweeteners” to a Social Security bill creating private accounts.

As the Center on Budget and Policy has pointed out, many of these provisions would benefit primarily the wealthy (and more than compensate the wealthy for the cuts to their benefits under the President’s proposal) while doing little or nothing to help middle- and lower-income people.

For example, Chairman Thomas is considering:

– Eliminating the income limits on Roth IRAs, currently $160,000 for married filers and

$110,000 for single filers. This would do nothing to help those with incomes lower than those levels and would cost a great deal of revenue in the future, when these higher-income people retire and withdraw funds tax-free. The Congressional Research Service found this could cost $9 billion a year after two decades, and experts at the Brookings Institution caution that this could cause some business owners who are currently themselves ineligible for IRAs to eliminate their employee pension plan, causing a reduction in pension coverage for the typical worker.

– Raising the contribution limits for IRAs and 401(k)s. These limits are now set at $5,000 for IRAs and $15,000 for 401(k)s and are higher for those 50 and older. Currently, only 5 percent of workers contribute the full amount allowed. Only 1 percent of those earning less than $40,000 did so in 1997, according to the Congressional Budget Office. This would therefore simply result in wealthier workers shifting money from taxable accounts to non-taxable accounts, costing massive amounts of revenue while only helping the well-off. In addition this measure could also cause a reduction in employer-sponsored pension coverage.

– Creating tax-free health savings accounts. These would violate what until now has been a principle of retirement savings policy: that a tax shelter can allow for tax-deductible contributions, OR tax-free withdrawals, but not BOTH. A major problem with this type of proposal is that some low-income people do not pay federal income taxes and therefore cannot benefit. Those who do are subject to lower tax rates than the wealthy, meaning the deductions provide a much larger tax break to the wealthy than low- or middle-income people.

– Other provisions being considered would be presented as measures to strengthen and support employer-provided pensions. Shoring up pensions has assumed more urgency in the wake of the a court decision allowing United Airlines to default on its pension promises to 120,000 workers, who now must rely on the underfunded Pension Benefit Guaranty Corporation to guarantee at least a fraction of their retirement plans.

Also being discussed are certain measures that could truly help middle- and lower-income people save for retirement. Many of these are embodied in legislation proposed by Senators Gordon Smith (R-OR) and Kent Conrad (D-ND) that does not involve privatizing Social Security. Smith and Conrad’s legislation would:

– encourage employers to automatically enroll employees in 401(k)s and increase contributions, allowing employees to opt out if they choose;

– extend a tax credit passed in 2001 for retirement savings for those earnings less than $25,000 and that is currently scheduled to expire in 2006;

– facilitate electronic transfers of federal tax refunds directly into IRAs; and

– make a portion of annuity payments tax-free.

While Chairman Grassley attempts to prod action in the Senate and Chairman Thomas plans a full-scale charge in the House, other members of Congress have introduced their own ideas. For example, Senator Jim DeMint (R-SC) has proposed a plan that would create private accounts not by borrowing but by using the Social Security surplus (the excess taxes that are currently being paid into the system to build up the trust fund, which is supposed to be used to keep benefit payments at their scheduled level between 2017 and 2041). It is not clear what size the accounts would be or how other details would be worked out.

The DeMint proposal would seem to cause some awkwardness with other Republican members since it seems to give up the goal of solvency in favor of creating private accounts (whereas Grassley might be giving up the goal of private accounts in order to focus on solvency) and because it relies on using the Social Security trust funds which the President has already said do not actually exist. The argument that the surplus Social Security taxes do not or should not go into the trust fund would also seem to highlight the fact that the Bush Administration and Congress have been spending those surpluses for several years now.

In the midst of the confusion over what a Social Security plan in Congress might look like, the anti-privatization campaign has taken its message into areas that are typically thought to be friendly to the Bush Administration. Americans United to Protect Social Security is stepping up activities coordinated with people of faith, people in “red states” that voted for Bush in 2004, and individuals who voted Republican but who oppose the plan to partially privatize Social Security.

Democrats in Congress have reinforced these efforts by launching a Rural Social Security Coalition, which has released a report showing that rural counties depend on Social Security nearly twice as much as other counties.

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