Response to Karl Sweetman

[National Dialogue Moderator <moderator>]

Mr. Sweetman,

Thank you for your kind remarks.  It is clear from your questions that you
have spent much time analyzing alternative solutions to Social Security and
I am happy to respond to your questions.

(1)  Regarding the 2% carve out for personal accounts, you asked about the
possiblity of an age-appropriate sliding scale carve-out where current and
near retirees continued to pay their FICA taxes into the current system,
workers under age 25 contributed the whole of their FICA tax to a personal
account, and those in between paid a portion of their FICA into both.  When
I first looked at this issue, I too wanted to maximize the contributions to
personal accounts.  Unfortunately, a 2% carve-out was all we could afford.
One percent of payroll is equal to approximately $35 billion per year now
and will grow to approximately $50 billion per year very soon. It is very
hard to create a Social Security bill that is both balanced and solvent with
a carve-out larger than 2% without significantly reducing benefits for
current and near retirees, or requiring significant transfers from general
revenues (non-Social Security revenues) to pay benefits.

That said, there are some bills that gradually increase the contributions to
personal accounts over time. The proposal offered by Rep. Nick Smith (R-MI)
is an example. I believe his bill begins with a 2.5 -2.8% carve out and
increases to 10.4% at some point in the distant future.  His bill also
involves larger reductions in the defined benefit from Social Security than
our bill; brings exempt state and local government workers under the
umbrealla of Social Security; and raises the early eligibility age from 62
to 65 and the normal retirement age from 65 to 69. Contact his office or
check out his website for more details.

Another option we considered was a voluntary opt-out.  Unfortunately, we
discovered that "cherry picking" under the new system --  a process where
the wealthy and the young opt out, but the aged and the poor remain in the
traditional system -- would seriously undermine the financial stability of
Social Security.

(2)  You and I agree on the need for comprehensive tax reform.  Our current
tax code is costly to enforce and costly to understand and comply with.  It
creates inequities, encourages tax evasion, and creates disincentives to
work.  I do not believe, however, that Social Security reform -- or
specifically, my reform plan -- would complicate the potential for tax
reform.  Indeed, I think it will do much to enhance the potential for
broad-based tax reform.

First, with a simple rallying cry, "Save Social Security first!" the
President has successfully stymied any efforts of tax reform without first
addressing the long-term financial crisis in Social Security.  A
comprehensive reform plan that restores solvency to Social Security will
open the gates for a bipartisan discussion of tax reform.

Second, unlike other Social Security proposals, the Kolbe-Stenholm bill does
not rely on uncertain projected budget surpluses.  Our plan is solvent and
balanced regardless of whether the on-budget (non-Social Security) surpluses
ever materialize.  By enacting our plan, if the surpluses do appear, this
money can be dedicated 100% to broad-based income tax relief.

(3)  I disagree with your statement that the carve-out in our bill places
additional pressures on general revenue.  The Kolbe-Stenholm proposal is
self-financing.  As I state in the summary materials, the Kolbe-Stenholm
bill does not rely on double-counting, cost-shifting, acccounting gimmickry,
or uncertain projected budget surpluses for solvency.  Consequently, there
is no crowding of other government programs under our bill.

Thanks for your interest and I hope I've addressed all of your questions.

- Jim Kolbe