In his two years as Treasury Secretary, former corporate chieftain John W. Snow has earned a reputation as a super salesman for his boss's economic policies. He successfully shepherded President Bush's controversial dividend tax cut through Congress in 2003 and was relentless in touting the Administration's economic program during last year's campaign. But now he faces a more daunting challenge: Winning approval of Bush's bold plan to revamp Social Security by introducing private investment accounts.
Snow kicked off his efforts by traveling to Wall Street to meet with financiers worried about the extra government borrowing that the plan will entail. The Treasury chief took time out from those discussions to meet with BusinessWeek's editors and writers in New York on Jan. 10. Edited excerpts of that conversation follow:
Q: Why reform Social Security?
A:It isn't sustainable. People are living longer and are having fewer children. The ratio of workers to retirees is falling. We started out with 16 workers for every retiree 70 years ago. Now we have three, and we're going to two with the baby boomers. The pay-as-you-go system works great when you have 16 people paying in contributions for every person drawing benefits. But when you get to 2 to 1, the system is in jeopardy.
Q: So is this a crisis?
A:I leave it to semanticists to tell us whether it's a crisis or not. But it seems to me it's a pretty serious situation. In 2018, the lines cross so that the outflows [in benefit payments] exceed the inflows [from contributions]. By 2042, the surplus built up in the Social Security trust fund is exhausted, and the system is technically bankrupt. It's time we modernize Social Security so it can be sustained for future generations.
Q: That seems like a long way off. Why act now?
A:Every year you postpone action, the problem becomes bigger and bigger. Look, you don't wait until your house is falling down around your ears to prop up the girders. You address the problem of creaky girders before they collapse on you. We've got, in effect, creaky girders in this system. It isn't going to sustain itself. Now is the time to strengthen the girders.
Q: The President has said he wants to give younger workers the opportunity to use some of their contributions to Social Security to set up personal investment accounts. How will that help?
A:They're integral to the solution. The money in these accounts builds up at rates that are better than the return on the tax money going into Social Security. If you're 20 or 30 years old, you have a long time to let market performance build the value of your account. In return, you have agreed to reduce your claim on future Social Security benefits. That reduces the system's unfunded liabilities.
Q: But the government will have to borrow billions of dollars to finance the transition to those private accounts. Aren't you worried that will push up interest rates?
A:I wouldn't be particularly concerned if it's done right. Remember, there's this unfunded obligation out there. The present value of that gap is $10.4 trillion. If we do it right, we bring that obligation down. The numbers that are being tossed around for the extra borrowing [to set up personal accounts] are a half-trillion to $2 trillion. To spend a trillion to extinguish $10.4 trillion is a good trade.
Q: The President has said he's opposed to raising payroll taxes to help close the Social Security gap. Does that mean he's also opposed to raising the wage cap on payroll taxes, which is currently at $90,000?
A:What we're saying is that he's opposed to raising rates. At some point we'll be dealing with Congress, and those issues will be on the table, and we'll get into them. But there's no reason to negotiate with yourself now.
Q: You mentioned that people are living longer. They're also working longer. Wouldn't it make sense to increase the retirement age for Social Security to more closely reflect how people are living?
A:In two or three of the 20 or so proposals that are in Congress, that idea is talked about. People are moving in that direction.
Q: Are you O.K. with that?
A:That's the sort of discussion we'll have with people in Congress. But I don't want to see anything taken off the table, except the things the President has [objected to]. You can go a long way with fairly modest changes to the retirement age to close the gap.
Q: So everything is on the table except a hike in payroll tax rates?
A:The President has said he wants personal accounts. He has also said he wants a real fix. He's saying let's get it fixed forever. We don't want to kid ourselves into thinking we've got it fixed when we haven't.