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Legislators join forces on Social Security reform
By Andrew Balls in Washington, Financial Times
Published: December 8 2004 02:00 | Last updated: December 8 2004 02:00

US lawmakers unveiled a bipartisan attempt to reform Social Security yesterday, with a Democrat backing Republican-drafted legislation that would part-privatise the pensions system.

Jim Kolbe, an Arizona Republican, said that Allen Boyd, a Florida Democrat, had signed on as a co-sponsor of his Social Security reform bill.

The Kolbe-Boyd bill is one of a number of congressional proposals on reforming the pensions system but the only bipartisan effort. Most Democrats oppose the part-privatisation of Social Security.

President George W. Bush has said that Social Security reform, including personal accounts, is a priority. But it is unclear whether the White House will present its own plan or throw its weight behind a congressional proposal.

The Kolbe-Boyd bill would allow individuals to divert 3 per cent of their 12.4 per cent payroll tax for the first $10,000 (?7,450, ?5,150) of earnings, and 2 per cent up to the current payroll tax threshold of $87,900 into personal accounts. Benefits under the bill would be cut over the long term while protecting the retirement incomes of low-income workers, and would also increase the payroll tax maximum to $133,200, in four stages, by 2008.

Mr Boyd has long been a proponent of Social Security reform and is a past co-sponsor of this reform bill, formerly co-sponsored by Charlie Stenholm, a Texas Democrat who lost his seat last month. Like Mr Allen, he was a member of the "Blue Dog Coalition" of Democrats who focus on budget issues.

Mr Bush has laid out principles for reform including the creation of personal accounts, protection of benefits for current retirees and no increase in taxes.

A sticking point is that congressional proposals - including the Kolbe-Allen bill - require an increase in taxes to help meet the costs of introducing personal accounts as part of Social Security reform. Congressional Republicans have warned that tax increases will be required to win any support from Democrats.

The White House approach would mean that transition costs would be met by borrowing - seemingly at odds with Mr Bush's pledge to halve the fiscal deficit over four years. Many independent economists charge that this approach rests on unrealistic assumptions.

Mr Kolbe, in an interview before yesterday's announcement, said: "Outlining principles and nice things like personal accounts is fine but you have to start talking about the actual costs and how you are going to pay for it.

"Personal accounts just make the cash flow problem worse if you do not address the other side, which means cutting benefits and raising taxes. It would be totally irresponsible to borrow all of it," he said.

Mr Bush continued to rule out raising taxes as part of reform after meeting the Republican and Democrat congressional leadership on Monday.

The non-partisan Congressional Budget Office has said the personal accounts envisaged in the Kolbe-Boyd plan would cost $1,160bn over the first 10 years. Taking into account the tax increases and benefit reductions, the impact on the unified budget would be about $660bn.

The leading proposal put forward by the 2001 Presidential Commission on Social Security reform would cost up to $2,000bn over 10 years, according to the Social Security Administration.

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