Where Social Security Reformers Blew It
By Howard Gleckman
Last spring, President Bush gave his handpicked commission on reforming Social Security a simple charge: flesh out his campaign promise to create private retirement accounts as a partial substitute for the traditional Social Security system. Bush told his Commission to Strengthen Social Security, co-chaired by former New York Democratic Senator Daniel P. Moynihan and Richard Parsons, AOL Time Warner's soon-to-be CEO, to come back with a blueprint by this fall.
Alas, it was an opportunity squandered. Instead of a single recommendation, the commission offered three alternatives. One would let workers shift 2% of annual pay, or about a third of what they contribute to the payroll tax, to private retirement accounts. A second would allow contributions of 4%. And the third option would allow contributions of up to 3.5%. To help hold down the program's cost, the second and third would also reduce the promised basic Social Security benefit (see "Who Loses under Social Security Reform?").
Cutting benefits is political dynamite. But even such trims wouldn't fully pay for the transition to private accounts. The commission acknowledged that this shift would cost $2 trillion to $3 trillion during a period ranging from about 2009 to roughly 2040 (the time frame differs depending on which option is used).
That's where the panel blew it -- by getting lost in the magnitude of the political problem without offering a solution. The commissioners deserve credit for saying that any serious private-account plan will require cuts in basic benefits. In theory, those reductions would eventually be more than offset by the higher returns from the accounts themselves. But the panel failed to say where the extra $2 trillion to $3 trillion would come from. There are only three possibilities: The government can raise taxes, it can borrow the funds, or it can use general revenues, which means dipping into any government surplus.
The choice is critical to the success of a private-account plan. But the panel punted. Says commissioner Estelle James: "How much to slow down benefit growth, how much to increase revenues is a decision for the President and Congress. The answer depends on a value judgment." Politicians make value judgments all the time. It would have been useful for this group -- which included a number of well-respected Social Security experts -- to tell us which it preferred. Instead, it offered up what Brooking Institution economist Peter Orszag calls "the mother of all magic asterisks."
And here's the biggest rub: The panel ducked because the President ordered it to. Moynihan admitted that Bush told him in an Oval Office meeting on Oct. 30 to lay out a series of options rather than a single specific plan. And it was clear from the beginning that the panel would not be allowed to discuss funding options.
Why? Because addressing that aspect of the issue would raise a political red flag. Bush himself ruled out raising payroll taxes. No Bush commission was going to propose boosting income taxes. Paying for a transition out of the surplus might have been a good option -- except the surplus is gone for the foreseeable future.
The commissioners tend to pooh-pooh that problem. Bob Pozen, the vice-chairman of mutual-fund giant Fidelity Investments, implies that the disappearing surplus is just a temporary problem. "What's happening today," he says, "just isn't that important."
Oh yes it is. The Bush tax cut enacted last spring will cost nearly $2 trillion this decade and, by some estimates, as much as $4 trillion from 2011 to 2020. The war on terrorism will reduce the surplus even more. And funding the expected huge costs increases in Medicare and Medicaid -- which present a far bigger fiscal challenge than Social Security -- will drain hundreds of billions more from federal coffers. Add it up, and no surplus will be available to fund a transition to private accounts.
That leaves just one option -- borrowing the money. Top White House officials have privately admitted for months that this is the only real answer. But six months after signing one tax cut -- and just days before possibly signing another -- there was no way Bush would have his own panel admit that the only way to create private Social Security accounts would be for Washington to start printing money.
The Social Security Commission did a good job reminding Americans that the Social Security problem has not gone away. Unfortunately, a close reading of its report also reminds us why reform isn't likely to happen any time soon.
Gleckman is a senior correspondent in BusinessWeek's Washington bureau
Edited by Beth Belton
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