By Richard S. Dunham
President Bush's 2005 State of the Union address was all about faith and freedom -- and not just freedom in Iraq and expanded faith-based programs in inner cities. The same formulation also applies to Social Security. The President's plan for the venerable retirement system, sketched out to the nation and a polarized Congress on Feb. 2, amounts to faith and freedom, too.
Freedom to use up to 4 percentage points of the payroll-tax payments that currently go to today's retirees and instead use it to, in Bush's words, "build a nest egg for your own future." And faith? It's the belief that somebody will ante up enough money to refill Social Security's coffers and make the long-term fixes needed to return the system to actuarial balance.
All in all, the President made the most cogent and coherent case yet for his plan to replace today's guaranteed Social Security benefit with a new system that allows those born after 1950 to voluntarily accept a smaller government check, with the possibility of earning a much greater return by investing in "a conservative mix of bonds and stock funds." The program, Bush said, would be modeled on the "thrift savings plan" offered to federal employees that gives workers a choice of five low- to moderate-risk investment options (see BW Online, "The Social Security Blueprint").
NO DOOMSDAY TALK.
A senior White House official told reporters that any American whose investment account received an annual return of more than 3% would do better under the Bush plan than in the current system. Most financial planners consider 3% to be a modest return over the long term.
By dropping his apocalyptic rhetoric about a "crisis" in Social Security today -- doomsday talk that some Republicans in Congress had dismissed as ill-considered exaggeration -- the President regained his equilibrium in discussing the long-term fiscal problems faced by the 70-year-old program. Bush dispassionately read from reports of nonpartisan analysts who have concluded that Social Security will be paying out more than it takes in by 2018 and could face bankruptcy by 2042, unless changes are made.
It's hard to deny that Social Security eventually will be stretched to the breaking point by the combination of longer life expectancy and the huge baby boom retirement wave that will commence in three years. Still, many prominent Democratic elected officials have decided that it's smart politics to deny that any major problem exists -- and a handful of lawmakers yelled "no, no, no" when Bush recited statistics describing the coming shortfall.
But while he laid out the problem effectively, the President didn't explain how his proposed solution would avert the fiscal disaster he foreshadowed. Indeed, by robbing the Social Security system of a large chunk of its payroll-tax revenue, he would exacerbate the problem, at least until the under-55 set started to receive smaller guaranteed benefits from Social Security.
The Administration promises to flesh out the President's proposal in coming weeks, and a senior White House official insisted to reporters that the cost of taking money from the payroll taxes would come to $664 billion -- less than one-third of the $2 trillion projected by Senate Minority Leader Harry Reid of Nevada (see BW Online, 2/3/05, "The Fog of the Budget"). After all, what's a trillion dollars among friends?
With that kind of factual disparity, Americans can expect an extended bout of "truth by assertion" on both sides of the political aisle. And the Democrats' instant reaction indicates that they're playing to people's fears. "The Bush plan isn't really Social Security reform," Reid insisted in his nationally televised rebuttal. "It's more like Social Security roulette."
He predicted reductions in promised benefits of at least 40%. The Nevadan accused Bush of "taking Social Security's guarantee and gambling with it. And that's coming from a senator who represents Las Vegas."
BITTER BATTLES AHEAD.
The dichotomy between Bush's hopes and Democratic fears ran though the entire range of subjects covered in the State of the Union address. The President says freedom is on the march in the Middle East. The Democrats want to know the timetable for American troops to march out of Iraq. The President says the U.S. is safer and more secure because it took the offensive against Saddam Hussein. House Minority Leader Nancy Pelosi (D-Calif.) says Bush "has failed to put together a comprehensive plan to protect America from terrorism."
With that kind of fundamental disagreement, don't expect much unity on Capitol Hill. The President presaged bitter battles ahead over judicial selections, lawsuit limits, and that new Religious Right favorite, gay marriage. Bush's tone remains confident, upbeat, and bold. But even his strongest allies know he'll need more than optimism to turn his ambitious Social Security overhaul plans to legislative reality.
Dunham is BusinessWeek's Washington Outlook editor