February
8, 2005
Democrats Yield Social Security Initiative to Bush
By
Mort Kondracke
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.
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.
Mort
Kondracke is the Executive Editor of Roll Call.
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