Democratic Policy Group Would Cut Social Security for Top Earners in U.S.

A Democratic-led policy group is defying party history by proposing changes to Social Security to pave the way for recommendations this week by President Barack Obama’s deficit-cutting commission.

Washington-based Third Way said its plan would raise the retirement age, trim or eliminate Social Security benefits for high-income retirees, limit cost-of-living increases and provide money to help young workers create private retirement accounts.

The proposal, to be released after the presidential panel is due to issue its report tomorrow, is timed to help create a buffer for congressional Democrats to support politically unpopular deficit-trimming measures, said Third Way spokesman Sean Gibbons.

“Whatever comes out of the commission is going to be a hot potato,” Gibbons said. “So we wanted to send something over that was especially hot.”

Social Security costs will exceed tax revenue beginning in 2015, according to the trustees’ 2010 report. The shortfalls will be covered by the plan’s trust fund until 2037, when those reserves are projected to be exhausted. Over the next 75 years, the trust fund would need another $5.4 trillion in current dollars to pay all scheduled benefits.

This month the Obama commission’s co-chairmen proposed gradually raising the retirement age to 68 and reducing Social Security annual cost-of-living increases, drawing a rebuke from Democrats led by House Speaker Nancy Pelosi of California. Democrats have branded their party as the protector of Social Security, a message that helped them take control of Congress in 2006. Republicans won the House majority in November.

‘Achieve the Goals’

Pelosi’s spokesman Brendan Daly said in an e-mail that any debt-reduction proposal must “achieve the goals of reducing the deficit, promoting economic growth and preserving Social Security.”

Republicans including House Minority Leader John Boehner of Ohio, set to become speaker in January, have argued for raising the retirement age and limiting or halting benefits for higher- income retirees. Most Democrats have opposed such means-testing out of concern that Social Security would become a poverty program and lose support among higher-income voters.

“The strongest and loudest voices on the left have nailed up the barricades on Social Security and said ‘hell, no’ and don’t want any type of cuts in benefits at all,” Third Way co- founder Jim Kessler, former policy director to Senator Chuck Schumer of New York, said in an interview.

In September, more than 100 House Democrats and 20 Democratic senators signed a letter to the commission warning the members not to touch Social Security.

Alice Rivlin

A handful of Democrats have advocated benefit cuts in addition to tax increases, including former Congressional Budget Office Director Alice Rivlin, a member of Obama’s debt commission, and Bill Galston, a former domestic policy adviser to President Bill Clinton.

The Third Way proposal is “an effort to break the silence, to make it a little easier for congressional Democrats who are thinking these thoughts privately,” Galston said.

Third Way describes itself on its website as “the leading moderate think tank of the progressive movement.”

The chairman of the group’s board of trustees is John L. Vogelstein, former president of private-equity firm Warburg Pincus LLC, and the vice-chairman is David Heller, global co- leader of Goldman Sachs Group Inc.’s securities division. Among the 12 Democratic members of Congress listed as honorary co- chairmen are Representative Jane Harman of California and Senator Evan Bayh of Indiana.

Bipartisan Policy Center

Obama’s deficit panel needs agreement from 14 of its 18 members to send a plan to Congress.

Rivlin also is a member of the Bipartisan Policy Center in Washington, which on Nov. 17 proposed increasing the amount of wages subject to Social Security payroll taxes and reducing the growth in benefits.

The plan by Kessler’s group, a copy of which was provided to Bloomberg News, will propose boosting monthly benefits for the lowest-income retirees while reducing them for higher earners. Cost-of-living increases would be smaller.

Some retirees would have to pay taxes on their full Social Security payments. Currently, individual retirees with $34,000 in outside income and couples with $44,000 must pay taxes on 85 percent of their benefits. The Third Way plan would require individuals earning $50,000 a year and couples receiving $60,000 to pay taxes on 100 percent of the benefit.

Social Security benefits would be reduced on a scale starting at individuals with $150,000 in outside income and couples with $250,000, and eliminated for individuals earning $200,000 and couples with $400,000 in income.

‘Should Not Receive It’

“Those who should not need Social Security at all should not receive it during their high-income years,” the proposal said.

The retirement age, now scheduled to rise to 67 in 2027, would gradually increase to 68 by 2041, to 69 by 2059, and to 70 by 2077. This would reduce total benefits by roughly $1 trillion by 2040, according to the plan.

The plan would provide annual subsidies of up to $500 to help workers under age 30 create 401(k)-style retirement savings accounts. It also proposes options for tax increases, including raising the payroll tax cap from $106,800 to $190,000 by 2020.

Tim Penny, a former Minnesota Democratic congressman who served on Bush’s Social Security commission, said he was “hopeful” about the Third Way report.

“Even if you love to death these entitlement programs, and we are in the process of loving them to death, at some point they begin to crowd out everything else,” said Penny. “There’s an immorality to that.”

‘Dealing With Reality’

Some Democratic lawmakers have said the party needs to face up to politically unpopular remedies. “Those who say don’t touch it aren’t dealing with reality,” Senator Kent Conrad, a North Dakota Democrat and chairman of the Budget committee, said in a Nov. 12 interview on CNN.

House Majority Leader Steny Hoyer of Maryland said in June that Congress should consider raising the retirement age and providing lower Social Security and Medicare benefits to wealthier beneficiaries.

Even the AARP senior citizens’ group that’s long fought benefit cuts appears to be open to at least some cutbacks. John Rother, executive vice president for policy at the senior citizens’ group AARP, praised the Bipartisan Policy Center plan.

“It’s more politically realistic” than the Obama panel’s draft and “in general I would characterize this as a more centrist approach,” said Rother.

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

To contact the editor responsible for this story: Mark Silva at msilva@bloomberg.net

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