DeMint's Social Security Plan Gets Attention, But Does Nothing to Address Solvency

Sen. Jim DeMint (R-SC) revealed a proposal for Social Security overhaul last week that has received the attention of both the White House and the House Ways and Means Committee. According to DeMint, the proposal -- dubbed the initiative to Stop the Raid on Social Security Act (S. 274) -- would stop members of Congress from spending Social Security funds that exceed the amount currently needed to pay benefits on other priorities. Many analysts believe, however, that the DeMint proposal will not cause a change in policy makers' spending behavior, and will bring risk to a currently risk-free benefits program and increase what are already record-high deficits. The DeMint proposal is co-sponsored by Sens. Rick Santorum (R-PA), Lindsey Graham (R-SC), Mike Crapo (R-ID), and Tom Coburn (R-OK). The DeMint legislation, according to his aides, would end the prevailing practice of artificially reducing the deficit by the size of the Social Security surplus and would instead treat the obligations to Social Security accounts as regular outlays. The government, however, could continue to spend the surplus on other needs, since the money would be invested in treasury bonds (just as payroll taxes are today). DeMint's plan also calls for the creation of an independent board that, starting in 2008, could offer individuals the opportunity to diversify their accounts into more risky stocks and away from bonds and mutual funds. Senate Finance Committee Chairman Charles Grassley (R-IA) has had a lukewarm reaction to DeMint's plan. Grassley, who has been working to bring a separate Social Security overhaul bill out of the Finance Committee, told reporters at the Capitol, "It's a proposal that I would see as a fallback proposal.... It's not my first choice, but right now I don't have a majority for anything." Grassley has stated in the past that his first priority is to pass legislation making Social Security solvent. While he supports the creation of private accounts, Grassley lacks a majority on the Finance Committee backing the accounts, as all Democratic members as well as Sen. Olympia Snowe (R-ME) have voiced continued objections. Grassley stated, "I might have a majority for solvency on my committee, but I don't have a majority for personal accounts, so everything's on the table." Many lawmakers and policy analysts have been quick to speak out against the DeMint plan, which they see as both costly and not sufficient to address solvency. Finance Committee Ranking Member Max Baucus (D-MT) characterized the DeMint plan as being part of a "bait-and-switch" strategy that will likely see the House approve a personal account plan and wrap it in a non-amendable conference report in an attempt to force enactment. House Minority Whip Steny Hoyer (D-MD) released a statement saying the proposal would do nothing to address solvency issues, and "would actually weaken Social Security's solvency by diverting the surpluses that are expected over the next several years and depleting the Social Security Trust Fund even sooner." Social Security expert Jason Furman of the Center on Budget and Policy Priorities has stated in recent congressional testimony that the proposal would drain $600 billion from the Social Security trust fund in its first 10 years and would also increase the deficit to nearly $500 billion in 2007 -- more than double the projected deficit for that year. Much of the cost would be administrative, with Furman noting that thousands of new federal employees would be needed to administer the accounts. The Social Security Actuary Committee has also looked at the DeMint proposal and released a memo warning it would increase levels of public debt, both by driving up deficits and also increasing the interest paid by the government on the national debt. The memo said, "The total debt held by the public is increased indefinitely due to the incomplete compensation of the trust funds through benefit offsets.... Annual unified budget balances remain worsened throughout the period due to additional interest on the [increased] debt held by the public." Meanwhile, the House Ways and Means Committee unveiled a proposal of its own on June 22, called "Growing Real Ownership for Workers" (GROW). The plan attempts to paint the creation of private accounts as more worker-friendly than they actually are. Under the plan, workers could elect to have their share of the Social Security surplus set aside in a private account. Critics have stated, however, that both Congress and the administration continue to miss the point as the proposal also does nothing to solve the issue of solvency. Rep. Jim Kolbe (R-AZ) stated, "If it's an attempt to get us off dead center, to move us forward, that's fine. But it doesn't fix the solvency [problem]: You'd have to borrow the money from some place else." The Center on Budget and Policy Priorities has estimated this extra borrowing to be $89 billion in 2006, with expected increases in subsequent years. The Ways and Means Subcommittee on Social Security also continues to hold hearings on the issue in preparation for a broad retirement reform bill that might possibly be offered by Chairman Bill Thomas (R-CA) later in the year. House aides are uncertain when exactly this legislation will be considered. On June 23 the subcommittee held a notable hearing to examine various privatization approaches. While the hearing was meant to bring opposing parties together on the issue to attempt to find compromise, the testimony instead touched on a wide range of views on how complex privatization might be. Barbara Bovbjerg, GAO's director of education, workforce, and income security issues, was pessimistic about private accounts, and testified that implementing private accounts would create major difficulties as lawmakers attempt to put into practice a system based on minimizing costs and unravel the complex administration process to make it work. Francis Cavanaugh, a former investment policy official in the Treasury Department, testified that private accounts are highly impractical and more expensive to manage than pro-privatization forces are willing to admit. He said the administration's estimate of a 4.6 percent return for investors was unrealistic; pointing out that it is much higher than the Congressional Budget Office figure of 3.3 percent. He said the cost to most of the nation's small businesses would be too high to "provide the investment, recordkeeping, counseling and other services" to pay for the system. Large investment service managers that now provide similar services to large corporations for 401(k) plans, Cavanaugh said, are costing about $3,000 per year per employee. Despite these repeated warnings of the risk and difficulties of private accounts, and despite the fact that no proposal for private accounts fixes the solvency problems of Social Security (in fact, most of the proposals make the system more insolvent), Republicans in Congress continue to make attempts to put private accounts into the Social Security system.
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