REVIEW & OUTLOOK
Not So Grand Bargain
How to turn election defeat into a Social Security rout.
The Bush Administration has been around long enough that by now we can smell a retreat in the making. To wit, the White House is getting ready to throw personal retirement accounts over the side in an attempt to cut a Social Security deal with the new Democratic Congress. Will a tax increase be the next concession?
President Bush has made no secret of his desire to claim some kind of Social Security deal as a legacy before he leaves office. Asked last week about possible negotiations, Treasury Secretary Hank Paulson declared there would be "no preconditions." Without quite admitting that personal accounts have to go, White House aides say dropping them is the price Democrats will demand even to discuss Social Security. While an attempt at bipartisanship is fine, the contents of the potential deal are worrisome.
The evident White House hope is that, in return for this retreat on personal accounts, Democrats would agree to reduce the growth of future Social Security benefits. Specifically, that means some form of "progressive indexing" that Mr. Bush endorsed in a failed attempt to coax Democrats from their just-say-no Social Security strategy in 2005.
Promoted by financier Robert Pozen, "progressive indexing" would adjust future Social Security benefits according to a cost-of-living index. Currently, benefits rise each year based on the increase in average wages, which over time has meant about 1% a year faster than general price inflation. This wasn't part of Social Security's original plan but became law in 1977 as politicians sought to buy off the senior lobby by increasing benefits. This means retiree benefits will double in inflation-adjusted dollars by 2077--so changing to an inflation standard certainly makes fiscal sense.
The Pozen plan is also "means-tested," meaning that the wages standard would change to the inflation standard on a gradual basis as retiree incomes rise. Lower-income workers would see no change in their benefit formula. Estimates are that the Pozen plan would nonetheless save enough money to eliminate about 70% of Social Security's current unfunded future liabilities. The White House hope is that if Democrats agreed to "progressive indexing," they and the President could then declare a bipartisan political triumph of having "saved" Social Security.
We endorsed the Pozen proposal last year, but that was when it was floated as a tradeoff for personal Social Security accounts. If those accounts are now off the table, then this kind of "grand bargain" is no bargain at all.
It is true that the Pozen plan would reduce future taxpayer liabilities on paper, but the key words are "on paper." No one can guarantee that future Congresses won't turn around and promise greater benefits once again as Congress did in 1977 and many other times over the years, even if the 110th Congress agrees to the Pozen formula. Al Gore used the temporary budget surplus as an excuse to promise more benefits as recently as the 2000 Presidential campaign.
More broadly, genuine Social Security reform is about more than federal accounting and "solvency." It ought to be about individual ownership and retirement independence. Personal accounts are a way to let younger workers--especially lower-income workers--put some of their payroll taxes into accounts that they would own and could grow over time. They would build wealth, and their future benefits wouldn't depend on the whims of future politicians. The Pozen plan by itself merely reduces their benefits and maintains Social Security as a cross-generational income transfer program.
As for "bipartisan" politics, Democrats cynically refused even to discuss Social Security reform last year, though they well know that benefits will soon start exceeding payroll tax revenues. Now that Democrats run Congress, they can reduce future benefits if they want to. But if they now want Republicans to give them political cover for doing so, at least the start of personal accounts should be part of the price.
There is also the issue of that 30% of future liabilities that would remain unfunded even under Pozen. Odds are that Democrats will pocket Mr. Bush's concession on private accounts and then move the goal posts. In return for even the modest Pozen reductions in benefit growth, they'll demand that Mr. Bush agree in the name of "fairness" to raise taxes too. And if Mr. Bush does that, his own political coalition will splinter like a tree hit by lightning.
We wish we were confident that Mr. Bush will resist this temptation, but Presidents on a legacy hunt are hard to predict. The Beltway press corps and many of his own advisers will also be cheering him on. His former White House economic adviser, Lawrence Lindsey, warned on these pages recently that the White House is contemplating precisely this kind of deal.
On Social Security, Mr. Bush fought the good fight, only to be foiled by Democratic intransigence and troubles in Iraq that slashed his approval rating and thus his power to persuade. His achievement has been to offer a framework for reform that will be vindicated by some future President. He shouldn't tarnish that by signing onto one more temporary Washington fix that trades an immediate tax increase for the promise of future benefit cuts.
