Democrats Yield Social Security Initiative to Bush

Posted February 4, 2005 at 5:09pm

It ought to be possible for President Bush and Congress to work out a bipartisan fix for Social Security. But first Bush would have to agree to at least consider tax increases. And Democrats would have to admit that there’s a problem. [IMGCAP(1)]

The day after Bush’s State of the Union address, Senate Minority Leader Harry Reid (Nev.) held a media event at the Franklin Delano Roosevelt Memorial, underlining how old-fashioned Democratic thinking is.

Meanwhile, House Minority Leader Nancy Pelosi (Calif.) declared, “this is a crisis of [Bush’s] own making, so he can have his pre-ordained idea about privatization, which undermines Social Security, which makes a guaranteed benefit into a guaranteed gamble.”

Every serious economist who looks at Social Security acknowledges that the system faces a 21st century shortfall. In FDR’s day — that’s 70 years ago — 16 workers paid payroll taxes to support each retiree. Now, that’s down to 3.3, and not long from now it will be down to 2.

In 2018, the amount of money collected in payroll taxes will begin falling short of what’s needed to pay benefits, and Social Security will have to start poaching from general revenue in amounts that get progressively bigger.

Democrats hissed Bush when he said that the system would eventually go “bankrupt,” but it will — in 2042 or 2052, depending on who’s estimating — and by law, benefits will have to be cut.

So, Bush has the high ground in at least addressing the issue, and that has given him the opportunity to seize the initiative in proposing a solution. Right now, the Democrats are reinforcing the GOP caricatures of them as naysaying obstructionists.

Moreover, Bush’s private savings account idea has political potency, especially for younger workers who don’t believe that they’ll collect any Social Security benefits when they retire. Many already save through 401(k) accounts, so Bush’s accounts are a familiar concept. And polls show that they favor his idea.

Democrats seem to be relying on the hope that opposition from seniors will help them defeat Bush’s proposal and that this will help them politically — say, the way defeat of President Bill Clinton’s 1994 health plan helped the GOP.

But it’s a fallacy. One of these days, Bush is going to get it through to seniors — indeed, everyone under 55 — that their benefits will not be cut a cent. Then the Democrats’ base of support will be cut out from under them.

And Republicans can claim that they are offering something good to younger workers — a bigger return on their tax money than Social Security allows. And, they’ll be right: Social Security earns 1.8 percent annual interest, while a mixed stock-bond index fund will return 4.9 percent after inflation.

Democrats shout that Bush wants to “play roulette” with Social Security or “give the money to Wall Street.” But those arguments are hollow. The 4.9 percent average return goes back to 1926, before the Great Depression.

And, as Bush and his aides point out, they’re refining his proposal to reduce risk and administrative costs — limiting the number of funds people could invest in, for instance, and covering losses from sudden market swings. Moreover, the private savings plan is voluntary. No one has to enroll in it.

Bush has been skating lightly over two big objections to his plan: first, that by themselves, private accounts won’t solve Social Security’s long-term solvency problem, and second, that the government will have to borrow huge sums to cover funds diverted to the accounts.

Over the next 75 years, the anticipated difference between payroll taxes and Social Security benefits is $3.8 trillion. There are three potential ways to close that gap: Cut benefits, raise taxes or let the government invest in private markets.

Bush has ruled out raising taxes. Various foreign governments have not done too well investing in private markets because politics gets involved in investment decisions. Bush isn’t saying what kind of benefit cuts he favors, leaving the hard part up to Congress.

Nor did he say in his State of the Union address that, to finance private accounts, the government will have to borrow. The White House puts the borrowing requirement at $745 billion in the first 10 years. Other economists say that, after that, the cost will be $1.5 trillion over each decade.

And that borrowing will come on top of other deficits the government was already going to run up due to Bush’s tax cuts and Medicare and Medicaid obligations.

Republican Sen. Lindsey Graham (S.C.) proposes to pay for private accounts by raising the current cap on wages subject to payroll tax from $95,000 to $140,000 or $200,000 while also perhaps lowering the tax rate from 12.4 percent to 11.4 percent. He’d also means test benefit cuts to protect the poor.

Other ideas have been advanced — by AARP, by economists at the Brookings Institution, by former Clinton White House aide Gene Sperling. Most of them involve tax increases of some sort.

Bush ought to be willing to consider raising taxes as a Social Security solution. But, to drive him there, Democrats will have to make a case for why he should. They can’t fight something with nothing.