What's Next in the Capital

Expect debate on Social Security, the tax code, and pensions, and that’s just for a start in year one of Bush Two Redux

Reforming Social Security is the biggest issue Congress will have to grapple with this year, and every American citizen is anxiously awaiting a decision. For financial planners and investment advisors, revamping Social Security–whatever the outcome may be–will affect all of their clients’ financial plans. But a heated debate is all we’re likely to see out of Congress this year, as no one in Washington, or across the country, expects lawmakers to settle on a solution. We can likely count on a tax bill and a pension reform bill this year, however.

A decision on Social Security won’t come easy because Republicans remain deeply divided on President Bush’s plan to revamp the federal program. Most Democrats, as might be expected, oppose outright the President’s plan to turn Social Security into a program where taxpayers’ benefits rely on personal retirement accounts–Lifetime Savings Accounts (LSAs), Retirement Savings Accounts (RSAs), and Employer Retirements Savings Accounts (ERSAs). Two bills were introduced last year promoting the adoption of LSAs and RSAs, but neither went anywhere. ERSAs were included in Bush’s 2004 and 2005 budgets, and industry sources expect the plans to be included in the 2006 budget, which is due out February 7. But one source says Bush may not even include Social Security reform in the 2006 budget, instead deciding to deal with the issue “in an off-budget manner.”

I participated in a recent conference call held by three Democrats–Rep. Sander Levin (D-Michigan), ranking member on the House Ways and Means Committee; former Rep. Barbara Kennelly (D-Connecticut), who was a member of the Ways and Means Committee and is now president of the National Committee to Preserve Social Security and Medi-care; and Roger Hickey, co-director of the Campaign for America’s Future. They told reporters that the administration’s proposed personal retirement accounts are a bad idea. Rep. Levin said Democrats’ mission is to “prevent the Bush Administration from wrecking what is the bedrock of income security protection,” noting that Social Security provides cash to 48 million people–retirees, the disabled, widows, and children who’ve lost a parent. The majority of people aren’t aware that 30% of Social Security benefits are going to the disabled, widows, and children, he said. Said Hickey: “The biggest crisis facing Social Security today is the President’s plan to privatize [it]. We welcome the fact that many Republicans now say they won’t vote for privatization.”

Democrats argue there is a surplus in the Social Security fund until 2018, and that the projected $2 trillion that would finance the transition to personal accounts, which is basically U.S. debt, “doesn’t address the Social Security challenge” 40 to 50 years from now when the funds are projected to dry up. Diverting such a large sum of money from Social Security to fund personal accounts would actually increase “the gap in the Social Security budget 20 years earlier than projected,” Levin said.