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Can Graham pull off Social Security coup?

An army of one, Republican Sen. Lindsey Graham of South Carolina is trying to save Social Security and save President Bush’s concept of private accounts.
Republican Sen. Lindsey Graham of South Carolina is trying to devise a Social Security re-design plan.Gerald Herbert / AP file
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An army of one, Republican Sen. Lindsey Graham of South Carolina, is trying to save Social Security as well as President Bush’s concept of private accounts.

This week, Graham claimed to have found one solution to the problem of paying for the transition from the current pay-as-you-go system to a personal accounts system. Graham would raise the “cap” on earned income that is subject to the 6.2 percent Social Security tax. Currently the first $90,000 of a worker’s earned income is taxed.

Graham touted the idea of a “donut hole” in the Social Security tax. Graham hasn’t worked out exact numbers yet. But as a purely hypothetical example, the Social Security tax would apply to the first $90,000 of income, the next several thousands of dollars of income would be exempt, but then the tax would resume on all income above $300,000.

The “donut hole” would let upper-middle class Americans off the hook, yet would force higher-income people to help pay the cost of transitioning to private accounts.

According to the Congressional Budget Office, subjecting all earnings to the Social Security tax would raise more than $1 trillion over ten years, which is approximately equal to the initial ten-year cost of the transition to a private accounts system.

No need to borrow?
“Raising the cap is one way to generate more revenue without having to borrow the transition costs,” Graham told reporters this week. “I’ve come to the conclusion that it is not responsible to borrow the transition costs and pass them on to future generations.”

But a tax increase on workers in the range of $300,000 and above may lead them to forego cash income and instead seek non-cash compensation from their employers, thus foiling Graham’s intent, by denying the government revenue he seeks.

The idea of raising the cap has long been a favorite of Democrats who have argued that high-income Americans ought to bear more of the Social Security burden.

It was only two months ago that Democratic leader and AFL-CIO president John Sweeney proposed raising the cap. “Congress could make the highest wage earners pay their share to Social Security by raising the cap on earnings subject to the payroll tax,” Sweeney suggested on Dec. 16. Upper-income folks "would hardly notice it," said Roger Hickey, co-director of the Campaign for America's Future, a Democratic-allied advocacy group.

But after Bush indicated Tuesday he was open to raising the cap on earnings, Democrats pounced, with Senate Minority Leader Sen. Harry Reid, D- Nevada, mockingly saying Bush would incur the wrath of conservative crusader Grover Norquist.

No retribution
Bush sounded a conciliatory and maybe unduly optimistic note Thursday, asking members of Congress to “bring forth your ideas… without political retribution.”

No retribution? What would the politics of Social Security be without retribution? Ronald Reagan learned this hard way in 1981 after his administration proposed delaying the annual cost-of-living adjustment for retiree benefits and cutting benefits for those who retired at age 62.

A bipartisan chorus of jeers sank those ideas and partly as a result of them, Reagan saw his party lose 26 seats in the House in the 1982 elections. Democratic leaders want to make sure Bush and private accounts backers get a 1982-style election reckoning in November 2006.

Even without Democratic fire, Graham’s mission is daunting. Some of Graham’s Republican colleagues detest his idea of raising the cap. Sen. John Sununu, R- N.H., who is offering his own private accounts bill, told reporters Thursday “raising taxes is a job killer…. The idea that you magically raise taxes without any economic consequences is wrong.”

But the ever-optimistic Graham was active on another front this week, reporting that Federal Reserve chairman Alan Greenspan had suggested to him a solution for the problem of calculating retiree benefits.

Change in benefit formula
When the Social Security Administration figures out a new retiree’s initial benefit, it uses a formula based on the real (inflation-adjusted) growth in wages during that worker’s career. First implemented in 1977, this is called wage-indexing and it means that the benefits Social Security has promised to future retirees will be higher in real terms than those paid to today’s retirees — that is, they would be higher if the system could pay full benefits, which as of 2042, it won’t be able to, according to the Social Security Trustees.

The Trustees predict a 27 percent cut in benefits in 2042 if no changes are made in the current system. In the coming decades, the Trustees predict, there will be too few workers, too many retirees.

To avert insolvency, some analysts have suggested switching to price-indexing of initial benefits, which would save hundreds of billions of dollars, but also would mean smaller-than-promised retirement checks for future retirees.

To lessen the pinch of switching to price-indexing, Greenspan suggested to Graham that he use a hybrid: wage-indexing (and thus relatively generous benefits growth) for low-income workers, and price-indexing, (less generous benefit growth) for higher income people.

Another actor in this drama, Senate Finance Committee chairman Charles Grassley, R- Iowa, also had indexing on his mind on this week, saying, “If we act now, we don’t have to increase taxes, all we have to do is make up for the mistakes made in the 1977 bill when they went to indexing for wages.”