Reviewer noticed a significant overlap of my submitted draft with an earlier paper of mine
There are two issues here; self plagiarism and possible copyright infringement. If your previous work has been published then you may not hold copyright to it any more and your rights to reuse the text may be limited. You should check that. If you do still hold copyright or a sufficient license from the publisher then you are clear on that. 

But self plagiarism is a separate issue. When a scholar reads a paper they also want the context in which the ideas were developed. So, if we use another work, we cite it so that the scholar can follow links, including the citations made in the earlier text, etc. If you just copy part of your own old work without citing it, you (probably) break that chain of context. You make the current work seem new and deny the scholar the chance of easily examining the context. 

If you have copyright to your work, you can probably safely reuse longer parts of the old work than if it were by another, but you still need to cite it. In such a case, quoting long passages is probably acceptable provided that you can find a suitable typographic convention to show what is old and what is new. But citation is still needed. 

The fact that a reviewer has raised the issue suggests that you have some work to do. First, you need to be clear about your copyright or your license. Second, you have to provide proper citations of things you use (i.e. quote) from the old work. Failing that, you are subject to having the work rejected. 

Rephrasing the old work is not the issue. That can be viewed as an attempt to disguise your intent, just as if you rephrased the work of someone else without citation. 

The fact that self plagiarism is viewed differently by different people is irrelevant here. This publication has raised the issue, so it is important to you. It is also, in general, safer to be conservative in such things just to protect your own reputation. If you use it, cite it. Easy rule.