Social Security benefit cuts eyed

WASHINGTON -- President Bush, who has promised that his plan to allow private investment accounts in Social Security would give workers a ''better rate of return," is seriously mulling a companion effort that could cut future promised retirement benefits for millions of workers by 6 percent, even when potential gains from private accounts are included, analysts said.

While Bush is weeks away from unveiling his plan, two senior White House officials said in interviews that the president is looking at a dramatic overhaul of Social Security that would go much further than allowing private accounts because the system is rapidly going bankrupt.

The White House plans to portray Social Security as facing a potential $10 trillion shortfall in reserve funds for future decades that may require significant sacrifice from taxpayers.

David John, an analyst at the conservative Heritage Foundation who has met frequently with White House officials as they prepare their proposal, said he has ''absolutely no doubt" that Bush will have to reduce the planned growth of benefits.

''There is no way you can avoid it," John said. ''The simple fact is that Social Security has promised vastly more than it can deliver, especially for younger workers." John said Bush is ''seriously considering" the idea of shifting the calculation of benefits from the current system of wage indexing to one that relies on price indexing, which usually is significantly lower.

Political leaders have been preparing to grapple with the Social Security system for years in anticipation of the retirement of millions of baby boomers, but they differ on how to handle it. Some Democrats say they are wary of Bush creating a crisis mentality to justify trimming promised benefits and investing funds in the private sector.

White House officials are bracing for possible criticism that Bush's plan will cut the expected growth in benefits.

''You can't compare a modernization to the current system," White House spokesman Trent Duffy said of the forthcoming White House proposal, while emphasizing that Bush has made no decision. ''The current system is fantasyland."

Asked whether changing the level of promised benefits should be considered a ''cut," Duffy said: ''In order for someone to legitimately say that is a cut, that person must also supply how they would sustain the current system. . . . The other option is, you could just shut down the rest of government -- no Education Department, no Transportation Department."

The administration's assessment of the problem is a far cry from 2000, when Bush said in a presidential debate in Boston that he would pay for his overhaul plan by using half of the budget surplus. That surplus no longer exists. Bush has also said repeatedly that he would not pay for the plan by raising Social Security taxes. Many analysts think that leaves only the option now under serious consideration, which is to change the way Social Security benefits are calculated from a system of wage indexing to price indexing.

But as word has begun to spread that Bush might change the way benefits are calculated, some Republican activists are trying to kill the idea before Bush announces a plan, fearing a major backlash.

''Some of these guys think they could rejigger the indexation of benefits to go from wages to [price] inflation, which would quote, save money, unquote," said Grover Norquist, president of Americans for Tax Reform. ''But the headline writers will say, 'Bush cuts Social Security benefits.' "

In the weeks since the election, Bush and his top aides have been adjusting their rhetoric on Social Security to lower expectations about the benefits, most notably on Dec. 2 when Bush's top economic adviser, Gregory Mankiw, warned that there is ''no free lunch" in fixing Social Security.

In an interview, Charles Blahous, Bush's adviser on Social Security, also sounded a note of caution, emphasizing that the current system will not be able to produce the level of promised benefits.

Bush himself has begun to recast the issue. On Thursday, when he repeated his longstanding pledge that he would not raise taxes to rescue Social Security, he sounded more dire than during the campaign. ''I think it's very important for the first step to be a common understanding of the size of the problem," Bush said. ''It's very important for those who are near retirement to understand nothing will change," but he added that ''for the sake of younger Americans, we must be willing to address this problem."

Privately, White House officials said the president's comments should be interpreted as an understanding by Bush that a cut in expected benefits for younger workers may be pitched as a tradeoff for giving them private accounts, even if those accounts won't bring them to the level promised under the current system. While Bush has been vague on this point, he said Thursday: ''I will not prejudge any solution."

White House officials said the task of preserving Social Security is daunting: The current system will begin taking in less money from workers than it is paying to retirees by the year 2018. If nothing is done, Duffy said, benefits eventually could plummet by up to 33 percent.

Still, some Democrats have said Bush is exaggerating the scope of the problem in an effort to persuade people to embrace private accounts.

''It is not a crisis; it is a manageable challenge," said Matthew Beck, a spokesman for US Representative Robert Matsui, a California Democrat, ranking member of a House subcommittee on Social Security. He said Democrats are waiting to see Bush's plan before putting forward an alternative.

Indeed, there may be as many different views about the seriousness of the problem with Social Security -- and plans to fix it -- as there are think tanks in Washington. Proposals range from raising Social Security taxes to cover the shortfall, to raising the retirement age, to doing nothing and letting a future generation deal with the problem.

But a report by the Social Security Administration declared that without substantial adjustments, the system would run out of money entirely by 2042.

''If Social Security is not changed, payroll taxes will have to be increased, the benefits of today's younger workers will have to be cut, or massive transfers from general revenues will be required," the report said.

Mankiw, chairman of the president's Council of Economic Advisers, gave a broad hint of the president's intention in a recent speech. He said it is ''infeasible" for Social Security to continue to be based on wage indexing because there are not enough workers paying into the system to fund promised payments.

''Benefits rising with wages could continue if the demographic shift were not occurring," Mankiw said. He added that the proposals put forward by Bush's Social Security Commission in 2001 ''are credible plans that recognize the no-free-lunch principle."

The most-discussed proposal by that commission would change the system of wage indexing to price indexing. Benefits currently are based on the average of a person's highest 35 years of earnings. Those earnings are then increased based on the annual growth in wages. The government's wage indexes usually rise about 1 percent to 1.5 percent faster than the price index, according to John, the Heritage analyst, so a system tied to price increases would not provide as great a benefit as one based on wages. (A shift would not affect the separate increase for cost-of-living variances, which already is based on price indexing.)

John calculated that the net cut in promised benefits would be 6.2 percent for someone turning 65 in the year 2022, even with private investment accounts. In his calculation, John estimated that a person with a private account would earn 4.7 percent, plus inflation.

John emphasized that such a plan still would leave workers with a better return than if the current system were allowed to gradually go bankrupt or if private accounts were not authorized. If nothing were done, that same person in the year 2022 would see benefits cut by 10.7 percent unless the system cashed in trust funds to make up for a shortfall, John said.

John's analysis is considered influential because he represents a conservative think tank enthusiastic in general about private investment accounts. In his recent policy memo, John wrote: ''Despite promises from both the left and the right to pay promised benefits in full, this is simply not realistic."

Michael Kranish can be reached at kranish@globe.com