Gore Vs. Bush On Social Security: A Choice Not An Echo

When Vice-President Al Gore traveled to Lexington, Ky., on June 20 to propose new tax breaks for retired workers, aides to GOP standard-bearer George W. Bush were quick to pounce. The charge: A flip-flopping Veep was conceding that stock market investments offer a cushier retirement than Social Security. Just weeks before, Gore hammered Bush for pushing private Social Security accounts that let individuals invest in equities.

True, Gore believes individuals could save more for retirement by playing the market. But the similarities end there. Market disciple Bush says Social Security is seriously broke and aims to fix it by giving individuals a say in how their pension plans are designed. By doing so, he would rewrite the social compact between government and future retirees, though not with today's elderly. Gore has a more traditional view: The New Deal entitlement program is basically sound and needs to be preserved intact.

What's propelling this debate are disputed projections that, come 2015, the system will start paying out more than it takes in and must begin redeeming the IOUs that make up the Social Security Trust Fund. By 2037, according to these government estimates, the fund will be empty, and there will be only enough payroll tax revenue to cover about 70% of promised benefits.

KEEPING MUM. Both Bush and Gore have ideological reasons for wanting to "save" Social Security, and their plans reflect those leanings. Gore would pay off the federal debt by 2013. Then he would use $100 billion in interest savings--money that would be available for tax cuts or other spending--to shore up Social Security. That extra savings from paying down the debt would make it cheaper to sell the bonds needed to redeem all those Social Security IOUs. Gore figures that such moves would keep the fund going until 2050. After that? He won't say. But he has only three choices: borrow, raise taxes, or cut benefits.

To supplement Social Security, Gore would add a Retirement Savings Plus account. Price tag: $200 billion over 10 years. The plan would work much like a corporate 401(k) plan. Workers would make tax-deferred contributions, and the government would match investments by low- and moderate-income wage earners. A couple earning $30,000, for example, would get a $3 match for every $1 saved.

By contrast, Bush wants to restructure Social Security. He would let workers invest two percentage points--about 16%--of their 12.4% payroll tax in private accounts. Those investments should generate far higher returns than the 1% or 2% workers get today.

But by reducing payroll taxes by one-sixth, Bush would have even less cash to pay benefits just when most baby boomers are collecting. Over the long run, higher returns from private accounts might make up the difference. But if government growth and productivity projections are right, seniors will have to accept reduced benefits or workers will have to pay higher taxes. Bush is mum about which course he prefers.

It's possible to combine the best of both plans--allow limited private accounts, provide minimum benefits, and keep the system solvent. Two proposals--one by Representatives Charles Stenholm (D-Tex.) and Jim Kolbe (R-Ariz.), another by Senators John Breaux (D-La.) and Judd Gregg (R-N.H.)--do just that. But they also acknowledge what Bush and Gore won't: If you accept the government projections, a real fix would mean trimming benefits for some workers.

Lately, it has become fashionable for analysts to opine that the budget surplus is pushing Bush and Gore closer together, since there is money to burn for tax cuts and Social Security. But this theory breaks down when you compare the Gore and Bush pension philosophy. One enshrines an icon of Big Government. The other worships at the altar of the marketplace--with all the risks and rewards that entails.

Before it's here, it's on the Bloomberg Terminal.