Tricky politics of Social Security

Seeking support for his plan, Bush ruled out a rate increase, but not a higher cap on taxed income.

President Bush is fond of saying that he doesn't want to "negotiate with himself" - especially over the issue of restructuring Social Security, his top domestic priority.

But as polls show that public support for his proposal to partially privatize the system has slipped, the president seems to be doing just that - a clear indication that his plan is in trouble. At a press conference Thursday, Bush specifically ruled out an increase in the Social Security tax "rate," but didn't rule out any other measures to address the program's eventual shortfall.

"We welcome any idea, except running up the payroll tax rate," the president said. Earlier this week, he suggested for the first time that he would consider raising the cap on income subject to Social Security tax, currently at $90,000.

Most Americans - 81 percent in last week's Washington Post poll - support that idea. But to the president's conservative base on economic issues, the idea represents a tax increase and is therefore anathema.

"First of all, we think it's a stupid idea economically; it would definitely hurt the economy," says David Keating, executive director of the Club for Growth. "Politically, it's stupid, too, because it muddles the strong Republican message that we stand for lower and limited taxes."

Other measures that could help forestall Social Security's insolvency, projected to occur in 2042, include raising the retirement age and reducing the rate of growth in benefits for future retirees. But those measures also face the opposition of strong majorities of the public.

Anything that effectively produces a benefit cut has traditionally faced stiff opposition from the public, thus earning the Social Security system the dubious title "third rail of American politics - touch it and you die."

Marshall Wittmann, a senior fellow at the Democratic Leadership Council, says Bush is testing the waters to see if there's any way to salvage his proposal. But "so far, not so good," he says. "That's why he floated the idea of raising the salary cap, to see if that would fly. He's desperate to find Republican votes as well as Democratic votes."

But, as expected, economic conservative activists such as members of Club for Growth are set against raising the salary cap. The president can't afford to lose that constituency - or worse, have it working against him. So, analysts say, by floating the salary cap increase, he has effectively killed the idea.

Another factor making Social Security change hard to effect is the highly partisan mood in Washington. The last time the system was changed, in 1983, the Republican White House and Democratic Congress forged a consensus. "You have to have a president who has the trust to build that consensus, so you can do it in a bipartisan fashion," says Mr. Wittmann. "Right now, he doesn't have that."

The salary cap - and the controversy surrounding changing or removing it - stems from philosophical underpinnings that go back to Social Security's creation under President Roosevelt in 1935. The system is considered to be a social insurance program first and foremost, and only partly a progressive vehicle to redistribute income. Since there is a cap on what any individual will be paid in benefits during retirement, there is also a cap on how much of any individual's wages can be taxed. This also explains why unearned income - from stocks, bonds, and the like - is not subject to Social Security tax.

This year, the cap on wages subject to payroll taxes is $90,000. It was $29,700 in 1981 but has been adjusted upward each year since then according to the gain in average wages. Back in 1981, some 90 percent of wage-and-salary earnings in aggregate were subject to the payroll tax.

But since then, the distribution of wages in the nation has shifted toward those in upper brackets. So only 85 percent of all taxable wages are subject to the payroll tax today. To restore the coverage to the 90 percent level, the cap would have to be hiked to $138,000. Such action would close about one-third of the 75-year gap that Social Security actuaries foresee between tax revenues and benefit payments.

Sen. Lindsey Graham (R) of South Carolina has been proposing a hike in the cap during the current discussion of changes in Social Security.

One other alternative being discussed would be to remove the cap entirely, as has happened with the payroll tax for Medicare. That would close the 75-year gap further.

At his press conference Thursday, called at the last moment to nominate the first Director of National Intelligence, Bush issued a call to Congress for ideas on fixing Social Security - and promised no political retribution: "Bring your ideas forward, and I'm willing to discuss them with you.' "

The president's call for bipartisanship came on the heels of comments Wednesday from Federal Reserve Chairman Alan Greenspan, who offered cautious support for the president's idea of "personal retirement accounts" in Social Security, carved out of payroll taxes, as long as the system is phased in slowly. "You have to do it in a cautious, gradual way," he told the Senate Banking Committee.

• Staff writer David R. Francis contributed to this report.