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The Beltway Battle Ahead


When George W. Bush kicked off his dramatic initiative to create a Medicare drug benefit in 2003, seniors' lobby AARP summoned up all its nationwide muscle to support him. It bought ads, called town meetings, and used a sophisticated telephone system to connect seniors to their representatives in Congress.

This year, as Bush embarks on an even more ambitious crusade -- revamping Social Security -- AARP is once again calling town meetings, buying ads, and hooking seniors up with their representatives and senators. But this time they are fighting the Administration. "Opposing this is our top priority for 2005," says AARP CEO William D. Novelli.

And Bush hasn't just lost AARP. While he always managed to enlist a few Democrats for his first-term proposals, he's having no such luck now. The normally fractious minority, still licking its wounds from a dispiriting November election, is nearly united in opposition to allowing workers to shift a portion of their payroll taxes into private investment accounts. Even many loyal Republicans are skittish about touching what has long been considered a third-rail issue. And now, sources say, Federal Reserve Chairman Alan Greenspan is expressing concern that extra borrowing to finance private accounts could raise interest rates.

Those dynamics promise to make the Social Security fight Bush's toughest legislative slog since he came to Washington in 2001. Unlike his signature tax cuts and Medicare changes, all of which handed out new goodies to voters, Social Security reform will distribute pain: Future retirees will have to accept some reduction in the benefits they've been promised by the government. And that's what will make restructuring such a hard sell. Says Vice-President Michael Franc of the Heritage Foundation: "For this to succeed, Republicans will have to have the engine running on all cylinders."

But with expanded majorities in both the House and Senate, Bush has plenty of horsepower and vows to use it. Besides, the President can count on a massive lobbying campaign by Corporate America to help convince the public of the benefits of personal accounts. Bush has made Social Security his No. 1 domestic issue, and defeat would be a major blow to his second- term agenda. And as friends and enemies alike have learned over the past four years, when George W. Bush wants something, he usually gets it.

Bush has so far refused to embrace any specific proposal. But he has given good reviews to a plan recommended by a commission he appointed in 2001. That proposal, known as Model 2, would allow workers to divert about a third of their payroll taxes -- four percentage points of the 12.4% tax that workers and employers pay -- into personal investment accounts, with a limit of $1,000 a year. The money could be invested in mutual funds, though the choices are likely to be more limited than many 401(k) plans, at least at first.

Individuals might get higher returns from those investments than they are effectively receiving from the government-run system. But that change would not close the multi-trillion-dollar gap between what Washington has promised future retirees and what it has set aside to pay them. So the commission plan would change the way a retiree's first-year benefits are calculated. Today, they are tied to increases in average wages during a retiree's working life. In the new system, they would be linked to price inflation. Because prices grow more slowly than wages, this seemingly technical and innocuous shift would slash promised benefits by close to 40% by 2075.

NO PAIN, NO REFORM?

For now, the public seems only dimly aware that restructuring Social Security, with or without private accounts, is likely to include deep benefit cuts. That's because Bush has focused his initial public-relations campaign on the urgent need to stabilize the system, plus the advantages of personal accounts. Bush has carefully said he would protect benefits for those retired or close to retirement, and he insists participation would be voluntary. But neither he nor his critics have said much about what will happen to the Social Security checks of everyone else. "Sooner or later, we are all going to have to confront that," says one Senate backer of accounts. "But no one is in any hurry." And while few pols will say so publicly, the fate of those benefits is what the Social Security battle is all about. "You can't do reform without some pain," says Senator Lindsey Graham (R-S.C.). "We've got to get somewhere between the promises the government has made and the cold, hard facts of tax increases and benefit cuts."

For many pols, the accounts are legislative eye candy -- a way to distract voters from the bite of benefit cuts or tax increases. "Accounts don't fix the solvency problem" says one senior Senate GOP aide."We need them to sweeten the pot."

For now, the public remains focused on the accounts. And it is far from ready to embrace them. In a Dec. 16-19 survey by ABC News and The Washington Post (DJ), 53% of respondents said they would support allowing people to invest some of their Social Security taxes in the stock market, while 44% were opposed. But when asked if they would favor the accounts if the government had to borrow money to set them up, support fell to 46%. And when respondents were told their benefits might decrease if the stock market went down, only 37% said they would personally contribute. "The public is deeply split on personal accounts," says Carleton College political scientist Steven E. Schier.

Both sides are tailoring their messages to exploit those conflicted feelings. Treasury Secretary John W. Snow insists the accounts will allow people to "build real wealth for their retirement." By contrast, AARP's $5 million campaign includes one ad -- headlined "Winners and Losers" -- that carries the dire tag line: "There are places in your retirement plan for risk, but Social Security isn't one of them."

To win over the public, Bush will deliver campaign-style speeches and hold town-hall meetings like the "conversation" he had on Jan. 11 in Washington with selected citizens from around the country. First, he is warning that there is a Social Security crisis just ahead, reassuring seniors that their benefits will not be affected, and promoting the benefits of personal accounts. Then he'll help Congress get rolling on a bill -- though the White House hopes to avoid specifics for as long as possible.

In many ways, the push for private accounts will be a replay of the Presidential campaign. Conservative advocacy groups, think tanks, and right-wing radio and TV talk-show hosts are getting behind the White House. And big-gun business lobbies, such as the National Association of Manufacturers, are joining together to beat the drum for private accounts through coalitions such as the Alliance for Worker Retirement Security. At the same time, seniors groups, unions, liberal think-tankers, and lefty activist organizations such as MoveOn.org are mobilizing in opposition. Even some of the powerful 527 committees that were built to help elect John Kerry, such as America Coming Together, may jump into the fray. Combined, the combatants could spend more than $50 million over the next year.

If Bush is going to make headway, though, he'll first have to bring together his own party. For now, the GOP is torn -- not over the accounts but over how to pay for them and whether any funding fix should include tax increases or benefit cuts. "We look like we are shooting in a circle," says one frustrated business lobbyist. There are at least four informal GOP factions, and their memberships sometimes overlap: enthusiastic reformers, those desperate to avoid benefit cuts, those who oppose tax hikes, and those who worry that huge transition costs will add trillions of dollars to a federal debt that is already approaching $5 trillion.

THE FREE-LUNCH BUNCH. The most gung ho reformers favor large accounts -- funded with up to 6.2% of payroll -- and oppose any tax hikes or benefit reductions to make the system solvent. Led by former House Speaker Newt Gingrich, former Vice-Presidential candidate Jack Kemp, Free Enterprise Fund President Stephen Moore, Senator John E. Sununu (R-N.H.), and Representative Paul Ryan (R-Wis.), they argue that the accounts will generate so much economic growth that total benefits will at least match what workers are promised today.

Sound familiar? It's perhaps the ultimate dream of supply-side growth driven by tax cuts. But it has a huge flaw. Today, payroll taxes are used to write checks to current retirees. If some of those taxes are diverted into private accounts, the money -- up to $2 trillion over 10 years -- must be made up somehow. The free-lunchers would either borrow the funds or make major cuts in other government programs to finance the transition.

Bush has not committed to such a borrowing scheme. But Wall Street sources say that Bush aides are already feeling out financiers to gauge the market impact of borrowing an additional $850 billion to $1.5 trillion.

Piling on debt is hardly GOP dogma. But the free-lunchers have an important motive: Their strategy lets Republicans avoid politically toxic payroll tax hikes or benefit cuts. The free-lunch crowd hopes that will help them win the votes of:

THE NO-BENEFIT-CUT CROWD. Most members of this group are Republicans who have to face the voters in 2006. While a few, such as House Ways & Means Committee Chairman William Thomas (R-Calif.) seem willing to tackle Social Security, most would just as soon see the debate go away. Says Moore, whose Free Enterprise Fund lobbies for a market-based agenda: "House guys are absolutely terrified of voting for anything that smacks of a cut in benefits."

Many senators have the same problem. Take Olympia J. Snowe of Maine. In 2006 she will run for reelection in a swing state with a population that is heavily poor and old. Those voters don't want to hear talk about restructuring Social Security, let alone trimming benefits. And neither does Snowe.

It's no wonder. A Dec. 9-13 NBC News/Wall Street Journal survey looked at three ways to bolster the system -- hiking payroll taxes, raising the retirement age, or cutting benefits. No more than one-quarter of respondents supported any of those ideas -- and benefit cuts were the most noxious, with only 4% signing on. Fully 40% said none of the changes was acceptable.

READ THEIR LIPS. Raising payroll taxes is another way to finance private accounts and maintain basic benefits. But that runs afoul of many House Republicans for whom any tax hike is anathema. "This is like breaking a marriage vow for Republicans," says Franc of the conservative Heritage Foundation.

THE DEFICIT HAWKS. That leaves borrowing the money -- which horrifies the fourth faction, a group that includes GOP budget watchdogs Susan M. Collins (Maine), Lincoln Chafee (R.I.), and Graham. Budget Committee Chairman Judd Gregg (N.H.) will oppose accounts funded only with government borrowing. "You can't just address this on one side of the ledger," Gregg says. "It has to be a comprehensive approach." The key player in this group is Graham, who would pay for accounts by raising the $90,000 cap on wages subject to payroll taxes. No matter how much Republicans hate taxes, Graham says, big borrowing is a nonstarter. "If this debate is about deficits," says Graham, "the reform movement is going to lose."

Republicans aren't just split on policy; they can't agree on tactics, either. Many lawmakers insist that Bush come up with a specific plan, especially if he wants benefit cuts and tax hikes -- steps they won't take without White House cover. But senators such as Finance Committee Chairman Chuck Grassley (R-Iowa), who are looking for bipartisan compromise, believe that any Bush plan would be poison to Dems.

Bush's margin for error is narrow. He cannot afford to lose many GOP lawmakers, especially in the Senate. "It will only take two or three of them to bring this entire enterprise crashing down," says one pro-reform Republican strategist. That's because Bush has almost no support from Democrats. Key Democrats signed on early to his tax cuts and Medicare initiatives. But many felt burned in their first-term dealings with Bush, and they won't forget. It will be easy for lawmakers such as Representative Charles Rangel (D-N.Y.) to oppose Bush's accounts and rally liberal colleagues. But even moderates are deeply skeptical. "There is zero trust on the Democratic side," says Will Marshall, president of the centrist Progressive Policy Institute. "After Medicare, there is no confidence that Bush will bargain in good faith."

To make the White House's job even tougher, the Democratic leadership has made opposition to Bush-style private accounts a litmus test for party lawmakers. New Senate Minority Leader Harry Reid of Nevada has put Bush's accounts at the top of his hit list. "The level of opposition and the extent to which this is being made a defining issue is greater than I've ever seen," says Ed Lorenzen, executive director of Centrists.org, a Washington-based bipartisan think tank.

In part, that's because the issue strikes at the party's heart. Says Trinity College political scientist Diana Evans: "This is fundamental for Democrats. If they lose [the] Social Security [issue], what's left of the old New Deal coalition?"

Democrats overwhelmingly reject Bush's private accounts, but they can't agree on how to respond to any plan he does roll out. Many say the party should mimic the GOP reaction to President Clinton's health-care-reform plan in 1993: just say no.

However, a handful of moderates insist that Democrats should not simply oppose the Bush plan. This group of perhaps a half-dozen senators is quietly talking to Grassley and Graham about a deal. "I don't know that we as Democrats should have knee-jerk opposition to the establishment of private accounts," says Senator Tom Carper (D-Del.). "Democrats and Republicans have a responsibility to work together."

"FUNNY MONEY"

But they have set tough limits on how far they will go. Carper is unwilling to support massive borrowing or sharp cuts in benefits. Another Democrat who has expressed interest in compromise, Senator Kent Conrad (D-N.D.), says he won't back any plan based on heavy government borrowing. "I'm very open to a serious consideration of ways to address the long-term challenges of Social Security and creating new incentives for savings," he says. "But I'm not going to be part of some funny-money financing."

Some of the most extreme proposals being floated by the White House, such as the shift to price indexing, are most likely political stagecraft that will enable Bush to claim compromise when he moves to a more centrist position. At the same time, the White House has been carefully using Graham to test the waters for possible payroll tax hikes. While the South Carolina lawmaker has been taking intense heat from the Right, Bush has not foreclosed the possibility of raising the payroll tax cap.

If Bush is willing to deal, he'll have a chance to fix Social Security, say both Democratic and Republican insiders. But he'll need to build bridges with Democrats and sell economic conservatives on compromise. Many Democrats, for instance, say they might support modest benefit cuts if they are accompanied by an increase in taxable pay to, say, $150,000. They also say they would back new incentives outside of the Social Security system that would encourage workers to save for retirement. Known as add-on accounts, these savings vehicles would effectively enhance existing 401(k) plans or individual retirement accounts without diverting payroll taxes. One major change: They'd create bigger incentives for low-income workers to save. Bush is already proposing his own new savings incentive called a Retirement Savings Account. With some tweaks to help lower-income workers, his proposal could become a model for add-on accounts.

Such a compromise would never satisfy small-government Republicans whose goal is to give Americans as much control over their retirement funds as possible while continuing to dismantle the New Deal. Nor would it mollify those Democrats whose real agenda is to hand the President a resounding defeat and who have little interest in giving up the Social Security issue for future elections. But if Bush were to cut a deal, he could seal an extraordinary legacy -- though it would cost him an awfully big chunk of that political capital he like to talks about.

By Howard Gleckman

With Rich Miller in Washington


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