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Social Security reform to get a new look

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As President Bush begins to spend some of the political "capital" he says he earned in this month's presidential election, Social Security reform is near the top of his shopping list. With a presidential push in the coming Congress, many conservatives believe they are closer than ever to achieving a goal of establishing personal retirement accounts that would partly replace Social Security.

But while Republicans have expanded their majority in both houses of Congress, observers expect a Capitol  Hill donnybrook as the G.O.P. takes aim at one of the landmark achievements of the New Deal.

“Traditionally Social Security has a strong constituency,” said Richard Johnson, senior research associate at the Urban Institute. “I don’t think they are going to see it go away without a strong fight.”

Support for Social Security once was so strong the program was considered the dangerous “third rail” of American politics. That may no longer be the case. After all, President Bush has now won two terms in office despite advocating Social Security reforms that were fiercely opposed by his Democratic rivals.

Likewise many Senate candidates who favor market-oriented Social Security reform were able to win tough elections last week, including John Thune of South Dakota and Mel Martinez of Florida.

“I think the likelihood (of reform) is probably higher now than it’s ever been,” said Sylvester Schieber, director of research and information for Watson Wyatt Worldwide, a benefits consulting firm. “I think the politics of Social Security are changing.”

President Bush has not specified exactly what kind of retirement accounts he would like to see, but said in his post-election news conference Nov. 4 that the work of his bipartisan commission on Social Security is “a good place for members of Congress to start.”

The bipartisan panel delivered its report in December 2001 and was all but ignored in the aftermath of 9/11. But its 256-page final report is getting a second look now.

The report offered a framework for giving workers age 55 and under the option of diverting some of their Social Security taxes into an individual account that could be invested through mutual funds into stocks or bonds. The plans would reduce the guaranteed benefit for workers who take advantage of the accounts.

Even if markets do well, proponents rarely argue that workers would be financially better off in retirement, but they say the plans would close the gap between what is promised to future retirees and what can be delivered. Even with individual accounts, the commission suggested that traditional benefits should be cut for future retirees, probably by indexing benefits to price inflation, rather than to the generally higher rate of wage inflation.

Tim Penny, a former Democratic congressman from Minnesota who was on the commission, said the time has come to face up to the financing gap in Social Security and the even larger one in Medicare.

“These are hugely expensive programs that are going to eat our lunch if we don’t make some changes sooner than later,” said Penny, who has left the Democratic Party to become an Independent.

Nobody has said how the government would pay for the cost of switching to a new system, which has been estimated at $2 trillion in present value. But that pales in comparison to Social Security’s $13 trillion long-term financing gap, Penny said.

“It seems to me it would be a lot more costly to try to patch up the current system,” he said.

Not that anybody is trying. Many opponents of partial privatization contend Social Security is not broken, citing among other data a Congressional Budget Office report that concludes the system can continue paying promised benefits through 2052.

That was the position staked out by Democratic presidential candidate John Kerry, who called partial privatization “an invitation to disaster.”

But given the wave of baby boomers that is about to hit retirement age, some combination of lower benefits and higher taxes will be needed to keep the system going.

“Nobody who has looked at this system carefully believes we can grow our way out of the problem,” said Schieber.

The American public appears ready for change. Public opinion polls long have shown support for the concept of personal retirement accounts as long as they are voluntary.

A post-election Rasmussen survey found 52 percent of respondents support Bush’s approach to Social Security reform and 34 percent oppose it. A Gallup poll last year found even higher support. In that poll more than half the respondents said that do not believe Social Security will be able to pay them the benefits that are promised.

“I think part of it is we have a nation that is cynical and skeptical about government to begin with,” said Scott Rasmussen, president of Rasmussen Reports. Another factor is that today’s retirees and workers lack the “emotional attachment” to Social Security of previous generations who came of age in the early years of the program, he said.

Opponents of reform argue that shifting to personal accounts would endanger Social Security’s role as a safety net for the oldest and most vulnerable members of society. But the Bush commission has proposed increasing the minimum benefits that would be paid out to low-wage workers, widows and widowers.

Another objection is that personal accounts would be a boondoggle for Wall Street and the mutual fund industry, which have not exactly distinguished themselves as financial stewards of the nation’s wealth in recent years.

Advocates contend the government can negotiate low service fees and create a system with low administrative costs, learning from the experience of countries like Britain, Mexico, and Chile that have established personal retirement accounts. One idea is a two-tiered approach that would allow a limited number of investment options to workers with accounts of under $5,000 and a much wider pool of options for larger accounts.

“Certainly you’re going to have to have an efficient enforcement mechanism,” said Michael Tanner of the libertarian Cato Institute. “The fact that you have millions more investors caring about what happens to them means you have more watchdogs. Despite all the scandals, investment is still a very safe and a good thing. People are better off invested than not invested.”