Bush Returns to Social Security

Is Social Security still the "third rail" of American politics, dooming to defeat the politician who dares to advocate real reform?

American voters may be about to find out.

President Bush and his advisers appear to think it isn't. They're considering a plan to return to Social Security reform as a keystone of Bush's reelection effort.

But the president's fellow Republicans in Congress aren't keen on that idea. Worried about fighting off Democrats' claims that the GOP aims to take away retirees' safety net, and trying to sell the new Medicare prescription-drug benefit, they reportedly want the White House to drop the issue.

That Social Security needs reforming, and the sooner the better, should be beyond dispute. "The case for reform is not a matter of ideology," says the Concord Coalition, a nonpartisan antideficit group. "It is a matter of simple arithmetic."

At the time President Franklin Roosevelt launched the retirement and disability program in 1935, 11 workers were paying into the system for every beneficiary drawing from it.

That ratio is now 3.4 workers per beneficiary. By 2030, it will be 2.1 to 1. By that same year, the number of older Americans will have doubled to 70 million from 35 million today.

But by 2030, Social Security will be paying out more than it's taking in. That transition will start far earlier - in 2018, the program's trustees say. If nothing changes, by 2042 the Social Security trust fund will be empty.

Three options are available to salvage the program: cut benefits (which could include raising the retirement age again), increase taxes, or substantially reform the program to allow market forces to pump in additional money for retirees. (An almost infinite number of combinations are possible.) Whatever Congress adopts, the sooner it acts, the more modest and less disruptive the change will be.

President Bush endorses a reform concept embraced by many thoughtful Republicans and Democrats: Create personal savings accounts and deposit into them a small percentage of each worker's Social Security payroll taxes. Individuals could invest the money in stock or bond funds or the money market. Over the long term, this would create an additional source of income for retirees and require less from the Social Security fund.

But other Democrats, labor unions, and the AARP oppose such an approach - not always for the same reasons. The AARP supports personal savings accounts, for example, but only in addition to the current benefits from payroll-tax deductions.

Without personal savings accounts, the government would have no option other than a combination of cutting benefits and raising taxes.

Peter Orszag of the Brookings Institution and Peter Diamond of the Massachusetts Institute of Technology recently unveiled a Social Security proposal that would do both. It would force Social Security coverage on local and state-government workers (a tax increase, should the Supreme Court approve) and levy a tax on earnings above the maximum taxable base (now $87,000 - another tax increase). It would also, CongressDaily reports, "impose a ... charge on future workers and beneficiaries, 'roughly half in the form of benefit reductions for all beneficiaries becoming eligible in or after 2023, and the rest in the form of very modest increases in the payroll tax from 2023 onward.'"

The plan would reduce benefits by slowing their growth. Democrats pilloried Republicans in the late 1990s for taking the same approach to Medicare; it will be interesting to see how many of them line up behind such an idea now. Opponents of personal accounts may face a difficult task explaining to voters why cutting their benefits and raising their taxes is a better idea.

In the end, however, the biggest short-term obstacle to reform is the state of federal finances. With deficits forecast for the next 10 years, and Medicare taking on that $400 billion prescription-drug benefit, there's little money left to fund the transition to personal accounts while protecting beneficiaries under the old program.

Social Security reform will require more courage and bipartisanship than is usually evident in Washington these days. Even if he won reelection on a reform platform, Bush would need all his political clout to persuade Congress to go along.