Nov. 27 (Bloomberg) -- Treasury Secretary Henry Paulson said last week that the White House is willing to begin negotiations with congressional Democrats on overhauling Social Security with ``no preconditions.'' This conciliatory move is exactly what Paulson has been signaling since he came to Washington and was probably negotiated by him before he accepted the Treasury position.

He has come to town to put partisanship aside and try to do the people's business. Can he succeed?

Paulson is well-qualified to be an effective go-between for the two warring parties. He's on terrific terms with the Democrats. His confirmation was a cakewalk, and his work at Treasury has received bipartisan acclaim.

When he agreed to attend incoming Ways and Means Committee Chairman Charles Rangel's policy retreat early next year, it was a refreshing signal to Washington insiders that the maddening ``with us or against us'' Bush team was no longer running the show. And a bipartisan Social Security effort should begin without conditions, a necessary indication that both sides will negotiate in good faith.

But Paulson also found last week that partisanship isn't a one-way street. In what looked to be a well-coordinated character-assassination campaign, Democrats came out spewing venom toward President George W. Bush's nomination of Andrew Biggs for a six-year term as deputy commissioner of Social Security.

Below the Belt

Biggs is a long-time advocate of allowing workers to shift some of the payroll taxes that fund the system into private investment accounts. Yet he is also widely acknowledged to be among the most learned and collegial Republican students of Social Security.

While the New York Times and other reliably Democratic editorial pages decried the Biggs appointment, Democratic politicians implicitly called for his head. It was a hit below the belt to go after such a well-qualified and well-liked candidate. Welcome to Washington, Mr. Paulson.

If a president can't appoint his most-trusted people to important positions, then he can't rule the executive branch. Of course, he will appoint a deputy commissioner who understands the benefits of private accounts. If Democrats will pick a fight on this, they will pick a fight on everything.

First Salvo

The Biggs brouhaha is just the first salvo. What Paulson is about to learn is that it will be easy to get Democrats to the table on Social Security. He need only let them write the legislation and agree to every term they dictate. He can offer cosmetic face-saving measures that make the legislation look like a victory for the president. But substantively, he will have to cave on everything.

Why? First, Democrats are on a winning streak and will be loath to hand Bush something that might be perceived as a victory by voters. They will not even begin to negotiate unless Paulson takes private accounts off the table. The final deal might have some expansion of current retirement vehicles such as 401(k)'s, but not a penny of your Social Security taxes will go toward a private account.

Second, Social Security solvency means one of two things. Either you raise more revenue with massive tax increases, or you cut the living daylights out of benefits for future retirees. Neither of those is a particularly popular measure.

Soak the Rich

Most politicians would prefer to go through their lives without ever doing either, at least not until the year before they retire. So why would Democrats do it? The only reason would be that they think they can take advantage of a weakened president and get exactly what they have always wanted.

It might be quite tempting to Democrats if a package of tax increases and benefit cuts, both focused on the rich, were in play.

So imagine that Paulson negotiates such a deal with Democrats, with just enough 401(k) expansion that Bush can claim a moral victory. It is at that point that Paulson gets his first genuine, full-throttle Washington experience.

While the Democratic leadership might find such legislation attractive, left-wing members of the party would likely be difficult to keep in line. They would fear that the expanded 401(k) accounts would be the nose under the tent of privatization.

Breach of Faith

Right-leaning Republicans would see the absence of payroll- tax-funded private accounts as a breach of faith, and would obstruct and filibuster. The compromise bill wouldn't be able to pass either house of Congress.

The problem with Social Security is that it might be easy for two people to work out their differences and come to an agreement about how to restore solvency and improve the system. But it is just about impossible for 100 people to do so. There are too many moving parts. Legislation on this issue is only likely to come when the finances of the system are truly in crisis.

That is bad news, and it would be far better to fix it now. When money runs out in the future, benefits will be cut and taxes increased, and many elderly people will have little time to adjust their retirement savings accordingly. But it is an uncomfortable truth that will hit Paulson squarely between the eyes next year if he continues to pursue a Social Security fix.

(Kevin Hassett is director of economic-policy studies at the American Enterprise Institute. He was chief economic adviser to Republican Senator John McCain of Arizona during the 2000 primaries. The opinions expressed are his own.)

To contact the writer of this column: Kevin Hassett at khassett@aei.org.

Last Updated: November 27, 2006 00:03 EST