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Latest Social Security Proposal Creates GROW Accounts

Called the McCrery-DeMint bill it would use surplus to fund private accounts

June 23, 2005 – Another Social Security reform proposal was announced yesterday under the marketing-oriented name of “GROW Accounts,” which the bill sponsors say stands for “Growing Real Ownership for Workers.” The uniqueness of this plan by four Republicans is that it has a new cut and this new name for the private investment accounts. They would take the Social Security surplus and dedicate it to GROW Accounts, “where it will be invested in no-risk, marketable Treasury securities.” The proposal was met with little enthusiasm by think-tanks or Democrats.

In a news conference billed as the announcement of a proposal “for protecting the Social Security surplus,” Jim McCrery (R-LA), Chairman of the Social Security Subcommittee of Ways and Means, took the lead in making the announcement. He was joined by Social Security Subcommittee Chairman Clay Shaw (R-FL), Rep. Sam Johnson (R-TX) and Rep. Paul Ryan (R-WI).

Ways and Means Chairman Bill Thomas (R-CA) said it was “a proposal to ensure the Social Security surplus is spent on Social Security.”

“This proposal will likely form the basis for one of the components of a developing retirement security package,” he said. Thomas added that this is a “common sense approach.”

“I support their efforts to find common ground on which we can move forward,” he added.

House Democratic Leader Nancy Pelosi released a statement saying the Republican proposal is “just the same risky privatization scheme in different packaging. It still includes huge benefit cuts to the middle class, massive debt, and a weaker Social Security program - ideas that the American people have already rejected.”

"Like the Bush privatization plan, the Ways and Means Republicans' proposal would divert payroll contributions to create private accounts. The only difference is cosmetic - one approach would create risky private accounts directly from a worker's paycheck, and the other would finance risky private accounts from Social Security payroll taxes when they reached the federal Treasury,” Pelosi said..

She said, "Democrats stand ready to begin bipartisan discussions on protecting Social Security solvency, but this cannot begin until Republicans begin talking about ways to make Social Security stronger, not weaker. Today's unveiling moves us in the wrong direction, away from ensuring that American workers receive the benefits they have earned.

"From the beginning, Democrats have said that the first step toward strengthening Social Security is paying back the trust fund. On the House floor this afternoon, Republicans yet again rejected Democrats' attempt to stop the Republican raid on the Social Security trust fund,” she added.

Barbara B. Kennelly, president, National Committee to Preserve Social Security and Medicare, echoed most of Pelosi’s opposition.

"Legislation proposed today by members of the House Ways and Means committee is basically the same private accounts package with a new wrapper for disguise. If Americans truly approved of private accounts, privatizers wouldn't have to hide them.

"The American people have made it clear. They want Social Security strengthened for the long term and they do not support taking money out of Social Security to pay for private accounts. Unfortunately, legislation being introduced by several GOP House members does nothing to improve Social Security's long-term solvency and focuses solely on creating private accounts.

"These private accounts would weaken Social Security by taking funds from the program. The main effect of this legislation is to speed up the date of insolvency, forcing deeper cuts in benefits and an increase in the federal debt.

"Supporters say this plan will stop the 'raiding' of Social Security by Congress. What it really does is give Congress permission to raid Social Security to create a private account system that Americans do not want or support.”

Robert Greenstein, Executive Director of the Center on Budget and Policy Priorities, also attached the McCrery-DeMint Social Security Proposal:

“Social Security would be in worse shape, not better shape, under the proposal put forward today,” he said.

“Under this plan, Social Security's current annual surpluses would be shifted to private accounts, rather than used to purchase Treasury bonds for the Social Security Trust Fund. This shifting of funds would end when the Social Security surpluses disappeared. By the sponsors' admission, this plan would do nothing to restore solvency to Social Security. Its purpose instead is to serve as a foot in the door for more extensive private accounts in the future.”

Greenstein said the plan has three “key flaws.”

“First, by diverting substantial sums from the trust fund, the plan would worsen Social Security's solvency problems both over the short run and over a longer horizon. Based on initial details, the plan would drain $600 billion from the Social Security trust fund in the first 10 years that the proposal was in effect. The plan may "wish away" this effect by assuming $600 billion or so in general revenue transfers from the rest of the budget, but such an assumption would be tantamount to a budget gimmick; the rest of the budget has no surplus revenue to transfer, as it is in deficit for as far as the eye can see. In the absence of such general revenue transfers, the plan would cause Social Security to become insolvent two years sooner, in 2039 instead of 2041.

“Second, the plan would substantially increase deficits and the national debt. The deficit in fiscal year 2007 would be about $476 billion, instead of the approximately $412 billion level expected under current policies. Unless the proposal were accompanied by offsetting budget cuts in other programs or tax increases, the federal debt would increase by $600 billion in the proposal's first ten years.

“Third, the proposal would require the hiring of thousands of new federal employees and increase government administrative costs. The added administrative costs would amount to at least $25 billion over the first 10 years the plan was in effect and possibly much more.

“In short, the proposal would do nothing to restore solvency to Social Security, while adding to our already spiraling national debt, and carrying significant administrative costs. Policymakers surely can do better than this,” he concluded.

Additional analysis on this issue can be viewed on the Center's web site: http://www.cbpp.org.

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