REVIEW & OUTLOOK
Social Security Breakout
How Bush can vindicate his Medicare giveaway.
With Medicare legislation out of the way, for better or probably worse, at least President Bush can now turn his political attention to fulfilling his promise to modernize Social Security. The scope of his opportunity will be evident with the release today of an official budget score of one of the more energetic reform proposals.
As Peter Ferrara details in The Wall Street Journal, the big news is that a transition to even large personal Social Security investment accounts can be financed without cutting benefits or raising taxes. This is the conclusion of Steve Goss, the nonpartisan chief actuary of the Social Security Administration, and his professional career staff.
Mr. Goss has run the numbers on Mr. Ferrara's proposal to let workers invest an average of 6.4 percentage points of the 12.4% payroll tax in such accounts, and more for lower-income workers. Under that proposal, Mr. Goss's analysis concludes, "the Social Security program would be expected to be solvent and to meet its benefit obligations throughout the long-range period 2003 through 2077 and beyond."
Recall that Mr. Bush campaigned in 2000 for a voluntary private-investment option for younger workers. Social Security is now an inter-generational transfer program, in which younger workers finance (out of current wages via the payroll tax) the benefits of current retirees. The reform idea is to allow younger workers to invest some of their payroll taxes in stocks and bonds that would allow them to build a nest egg that finances their own future retiree benefits. The accounts would be their private property and thus not vulnerable to future political whim the way the current system is.
The fiscal rub has always been how to pay for the transition from here to there--essentially, how to finance the unfunded Social Security liabilities associated with the looming Baby Boom retirements. Opponents of reform claim that steep benefit cuts or tax increases will be necessary--all of which they know (or hope) will be politically impossible.
The importance of Mr. Goss's number-crunching is that he shows this transition can be financed without either of those reform-killing caveats. It also rebuts the current Beltway conventional wisdom that the chance to reform Social Security vanished along with federal budget surpluses. And it rebuts the view, held even by some reformers, that only a small, two-percentage-point allocation to personal accounts is politically and financially doable.
Not that there is any free lunch. The transition would still have to be financed, and in the case of the Ferrara proposal Mr. Goss posits a combination of mild spending restraint on other federal programs (1% slower than baseline growth for eight years), more government borrowing for a time, and additional revenues that will come from higher corporate profits once the private investment from personal accounts begins to build. If spending restraint proves illusory, additional borrowing could make up the difference.
Before the Ross Perot crowd shouts about any new borrowing, keep in mind that the government is already obliged to pay Social Security benefits to future retirees. The only issue is how to pay for these promised liabilities. Without raising taxes or cutting benefits, the government will have to borrow more to pay Baby Boomer benefits in any case. In a transition to personal investment accounts, that borrowing would be larger in earlier years but it would be smaller in the future as the accounts built up assets.
The broader political and policy message here is that Mr. Bush and other reformers should think bigger. Intimidated by opponents, some reformers want to settle for smallish (two-percentage-point) accounts, but those would only lengthen the transition because assets would build so much more slowly. Mr. Bush's 2001 Social Security Commission did a superb analysis of the current system's future dilemmas, but it also posited overcautious solutions. The new Goss analysis shows the White House can afford to be bolder, and at a minimum needn't box itself in by agreeing to any "2%-solution" during the 2004 campaign.
We'd add that Social Security reform becomes even more important to Mr. Bush's Presidency and his political coalition in the wake of the Medicare giveaway. Republicans are bragging that by giving seniors a vast new entitlement they will sweep to victory in 2004. But the price of that "victory" has those of us who believe in limited government wondering what difference there is between the two parties.
The only real way for Mr. Bush to vindicate the Medicare fiasco is by using whatever short-term political advantage it provides to reform the other great entitlement for the elderly. His advisers could start by sending for Mr. Goss's memorandum.
