Jan. 27 (Bloomberg) -- Private accounts should be set up as an addition to Social Security rather than a partial replacement, said Senator Ben Nelson of Nebraska, a key Democrat working with Republicans on reform.

Any political solution to the controversial Social Security restructuring must include some ``tweaking'' of the program, such as raising the retirement age and increasing the $90,000 cap on taxable income, Nelson said today in an interview. Nelson, who is in talks with Senator Lindsey Graham, a South Carolina Republican, said a Republican proposal to change the formula for calculating benefit increases would be a ``a non-starter.''

President George W. Bush reiterated yesterday that restructuring Social Security to forestall the system's ``bankruptcy'' would be the domestic priority of his second term. Bush wants to allow younger taxpayers to divert a portion of the 12.4 percent payroll tax to personal accounts.

Nelson ``is the Democrat most willing to work with the administration,'' said Norman Ornstein, a congressional scholar at the American Enterprise Institute in Washington, citing the Nelson's support for Bush's $1.7 trillion in tax cuts in 2001 and 2003.

Nelson is now offering a compromise on Social Security: If Bush agrees to make the accounts supplemental, Democrats will give the White House ``bipartisan cover'' on more difficult questions, such as raising the retirement age, Ornstein said.

Protection for the Downside

Bush's proposal to divert funds from Social Security will be a hard sell with the public because Americans already place retirement money at risk in the stock market through employer- sponsored 401(k) plans, Nelson said, and ``they don't expect that with their Social Security.'' The proposal will be ``very difficult to explain and have people say `I'm not protected against a downside loss,''' he said.

Democrats including House and Senate minority leaders Nancy Pelosi and Harry Reid say Bush's plan, which is projected to divert $1 to $2 trillion over 10 years, will explode the federal budget deficit and put seniors' retirement money at risk while benefiting financial services firms.

The gap between Nelson's proposal and the White House stance is bridgeable, said Derrick Max, executive director of the Alliance for Worker Retirement Security, a group of 40 businesses and associations founded by the Washington-based National Association of Manufacturers.

``The good news is that Senator Nelson agrees Social Security has to be fixed, future benefit growth slowed and personal accounts created,'' Max said. ``His difference with the White House is on where to find the revenue. This provides plenty of ground for reasonable negotiation.''

`Permanently Solvent'

Nelson said he expressed his preference for a supplemental account system to Graham, the South Carolina Republican, though the White House hasn't approached him.

Bush hasn't offered specifics on his private accounts proposal. ``Any solution must confront the problem fully and directly by making the system permanently solvent and providing the option of personal accounts,'' he said at a news conference yesterday.

A commission he appointed in 2001 offered three options that would allow workers to divert from 2 to 4 percentage points of the 12.4 percent payroll tax to stock and bond accounts.

Bush said he'd travel to four or five states after his Feb. 2 State of the Union speech to promote his Social Security plan. The president will visit Nebraska on Feb. 5, Nelson said, though the private accounts proposal may not receive a warm reception. Nelson's constituents, he said, have responded to proposals for change to the system by telling him: ``Don't do anything.''

$1 to $2 Trillion Cost

``What doesn't work is going out to Omaha and stirring up Nebraskans,'' Nelson said. Bush ``didn't get 66 percent'' of the vote in Nebraska in 2004 ``by telling everybody he's changing Social Security,'' he said.

Nelson also expressed concern about the effect on the deficit of the projected $1 to $2 trillion cost of any plan to divert funding from the current pay-as-you-go Social Security system. ``I don't know if this is the best time to afford it if you're going to borrow the money,'' Nelson said. ``Deficits do matter.''

Nelson is joined by other key Democrats, including Senator Kent Conrad of North Dakota, who also is working with Republicans to craft a compromise, in opposing any plan that widens the deficit.

Bush is ``a little like he's captain of a ship that's taking on water and his answer is to bail into the boat,'' Conrad said in an interview. ``That strikes me as a very bad plan.'' The budget shortfall last year reached a record $412 billion.

`Tweak'

The most difficult decision lawmakers face is how to adjust the current system to plug the $3.7 trillion gap, Nelson said. ``Nobody wants to go forward and say what the tweaking is because you generate opposition immediately,'' he said. ``I just haven't figured out a painless way to do it.''

Nelson cited increasing the retirement age and means testing, or pegging future benefits to income levels, as options. ``These things all have to be on the table before you can finally say `this is what we're going to do,''' he said. ``You might not do that.''

Nelson ruled out pegging benefit increases to the growth in prices instead of wages, one of the options the administration is considering, according to a White House memo to Republicans earlier this month.

``That's off the table because that's changing benefits,'' Nelson said. ``That's assuming that 11-foot ladder to get out of a 10-foot hole. To me that's a non-starter.''

The White House also needs to address demographic and funding problems other than those posed by Social Security if it wants bipartisan support for a bill, making it unlikely legislation will pass this year, said Conrad.

``The Social Security challenge is an important thing to address, but it's relatively small compared to the problem of Medicare,'' he said. ``If you just try to deal with this in isolation, you'll fail.''

To contact the reporter on this story: Heidi Przybyla in Washington at hprzybyla@bloomberg.net.

Last Updated: January 27, 2005 13:46 EST