Monday, February 07, 2005

Courage, Cowardice, and Calculation

If America wondered about George W. Bush’s courage, there can be no doubt about it now. During the State of the Union address, the commander-in-chief did something few politicians before him ever attempted—and lived to tell about it. Mr. Bush proposed reforming the ultimate entitlement program: Social Security.

The president said both parties must make hard choices now. “The system,” he said, “on its current path, is headed toward bankruptcy. And so we must join together to strengthen and save Social Security.”

To avoid what he sees as a looming fiscal and demographic meltdown, the centerpiece of Mr. Bush’s approach would be to allow younger workers to keep a portion of their Social Security payroll contributions in their own accounts (which, unlike the current system, they could pass on to their heirs). Workers 55 and over would be grandfathered in and see no changes.

The president also said other reforms—such as raising the retirement age, indexing benefits to prices rather than wages, discouraging the early collection of benefits, changing the way benefits are calculated, and limiting benefits for the wealthy—are on the table.

“I know that none of these reforms would be easy,” Mr. Bush said. “But we have to move ahead with courage and honesty, because our children’s retirement security is more important than partisan politics.”

Not surprisingly, the party of FDR cried, “Heresy!” Harry Reid, the Senate’s new minority leader, apparently intends to follow in the footsteps of his predecessor, the former obstructionist-in-chief Tom Daschle. During the Democratic response, Reid labeled Bush’s ideas “dangerous,” likening them to “Social Security roulette.”

That’s not what the Democrats said when Bill Clinton was president, of course. In 1998, Clinton proposed using budget surpluses not for tax cuts, but to “save Social Security first.” Vice President Al Gore said, “Social Security faces a serious fiscal crisis.”

Why the suddenly cold feet? There’s more than political cowardice at work here. Democrats are making a cold political calculation.

One of the Democrats’ few remaining advantages over Republicans with voters is the perception that Democrats care more. What more powerful symbol of this alleged concern than Social Security, created by FDR during the Great Depression as a last-resort measure to keep Grandma from being thrown out on the street? If Democrats lose control of this issue, they risk losing control of the people who have come to depend on them for handouts. They also risk being the minority party for a generation.

So while President Bush tries to deal in facts, the Democrats predictably have returned to their old playbook of scare tactics. (Remember “Mediscare”?) Apparently they will block any action not proposed by Democrats. That’s what happens when you run out of ideas and your primary concern is political power.

In contrast to the scare tactics, here are some facts:

  • When Social Security began in the New Deal, 16 people were paying into the system for every person who collected benefits;

  • Today three people are paying in for every person collecting;

  • In a few years, it will be two paying in for every one collecting;

  • In 2010, the first of 76 million Baby Boomers will turn 65;

  • In 1935, when Social Security began, only 5.4 percent of the U.S. population was over age 65; today, 12.5 percent is;

  • The program will begin running deficits in just 13 years if nothing is done;

  • By 2033, if current demographic trends continue, the system will be running a $300 billion annual shortfall;

  • By 2042, Social Security will be bankrupt;

  • By 2060, according to the Cato Institute, Social Security will gobble up 71 percent of the federal budget.

Yes, of course there are risks, but the bigger risk lies in doing nothing. Bankruptcy or vastly larger payroll taxes—right now at 12.4 percent—would be a certainty. As to the fear-mongering charge that the stock market is too risky for Grandma to invest in, the real risk is in sticking with the current approach, which is terminally ill.

Reid and his cronies continually invoke magic words like “Social Security trust fund” and “lockbox” to give the impression that they can keep the system as it is. But despite what they imply, there is no “trust fund” bulging with Grandma’s contributions awaiting her retirement, and no “lockbox.” The government spends the rapidly dwindling annual Social Security surpluses, replacing them with IOUs. The only sources of her future “guaranteed” benefits are future workers—and proportionally there will be fewer and fewer of them, at that.

And while the current “guarantee” may be cut, so will many of the current constraints limiting annual returns. That means more money for seniors. According to Cato, Social Security recipients retiring today will receive an annual return of 2 percent for all their contributions over the years—barely above money market and CD rates. Future workers would likely get even less. Meanwhile, the Social Security Administration itself conservatively estimates stocks to return 6.5 percent annually in coming years (historical returns have been much higher).

Which rate do you think Grandma would prefer—2 percent or 6.5 percent? As Bill Clinton once said in another context, “Isn’t it obvious?”

Apparently not to Democrats, who are too cowardly or calculating to even discuss needed changes. If they don’t, they risk being exposed for the obstructionists they have become. They also face losing out on the credit that will accrue to those who—like President Bush—have the courage to take on this difficult issue.


Blogger Grandma_Ellen said...

It has also been said that one of the quickest ways to fix Social Security would be to eliminate the Congressional Retirement plan and make Congress part of the Social Security System. For every retired congressman and senator getting 120,000 per year salary until their deaths, ten Social Security retirees could have full benefits for the same year.

Many types of reform are needed in the Social Security system. One thing that is misleading, however, is that retirement age will be raised. Under the current system, it is being raised and will be age 70 for full benefits in a few years. It is currently nearly to age 66 instead of the previous age 65. I believe that only medicare remains at age 65, and I am not entirely sure of that.

Privatization of part of Social Security is not a bad idea, provided that there are tight controls put on where the money can be invested so that some poor investors don't end up without anything in the private side of their accounts and that there is some provision made for those who don't know how to invest not to lose those funds and end up with only 70% of their benefit.

Only a second term President can make any reforms. He doesn't have to worry about re-election! Let us hope that BOTH parties can put aside partisan wrangling long enough to do the right thing. Reform Social Security with some privatization, and also make Congress part of the system.

3:28 AM  

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