Jewish World Review May 16, 2005 / 7 Iyar, 5765

GOP, Bush should fold on Social Security reforms

By Robert Robb

http://www.JewishWorldReview.com | It's pretty obvious that President Bush's proposal for personal retirement accounts as part of Social Security isn't going anywhere.

Democrats have united in opposition; a critical mass of Republicans are squeamish; and public support has gone down, not up, as Bush has barnstormed the country in support of his idea.

There can be debates and recriminations about the reasons for this. It begins with Bush failing to run in 2004 on a specific enough Social Security plan for which to claim a mandate, and ends with Democratic deceptions about the realistic alternatives to personal retirement accounts.

But the political reality is that personal retirement accounts are highly unlikely to be passed by this Congress.

Substantively and strategically, the best move for Republicans now is to abandon efforts to reform Social Security.

Substantively, that's because the only reform worth pursuing is personal retirement accounts.

The current Social Security financing mechanism — in which today's workers pay taxes to fund retirement benefits for today's retirees — doesn't make sense given the current and anticipated future demographic trends in the country.

When Social Security was first adopted, there were over 40 workers for each beneficiary. In the 1950s, there were over 15. Today, there are 3.5, on the way to 2.

Simply put, there will be too few workers to pay retirement benefits at a cost that isn't unfair or doesn't do damage to the economy.

Instead, the country needs to switch to a system in which individual workers save for their own retirement over the course of their working careers. In fact, the real problem with Bush's proposal was that the personal retirement accounts were too small — they wouldn't allow enough replacement retirement income to be built up soon enough.

There are lots of knotty issues involved in making the transition from a pay-as-you-go financing mechanism to a true savings system. But it's the only reform that fits demographic reality.

Establishing personal retirement accounts is the primary reason Social Security reform is so urgent. They need awhile to build up replacement retirement income.

If they aren't going to be enacted, then there isn't an urgency to Social Security reform. Payroll taxes are projected to be sufficient to pay benefits through 2016. Cutting benefits today would ease the future financing problem, but it's hard to argue that it has to be done now rather than sometime between now and the ultimate day of reckoning. Raising taxes now would just increase what the general treasury owes the Social Security trust fund. Other than abstractly making Social Security's books tidier, there's no reason to raise taxes until the proceeds are actually going to be used to pay benefits.

There will, however, be a day of reckoning coming, regarding both Social Security and Medicare. The cost of these two retirement programs is projected to increase from 7 percent of Gross Domestic Product today to 20 percent over the next 75 years.

The financial pinch is already appearing. Payroll taxes were insufficient to pay hospitalization bills under Medicare last year. This year, they are expected to be insufficient to pay disability obligations under Social Security.

Right now, Social Security tax surpluses are being used to reduce what the federal government borrows. But those surpluses are projected to peak in 2008, and then decline steadily until a deficit appears in 2017.

So, it won't be that long until the costs of Social Security inaction become manifest: the need to reduce federal spending elsewhere, cut benefits, increase borrowing, or raise taxes.

At that point, the Democratic deception that there's nothing to worry about until Social Security reserves are exhausted four decades from now will be exposed. Declining Social Security surpluses will begin to cause a financial pinch even before the general treasury is called upon to somehow redeem over $5 trillion of Social Security IOUs.

That's why, strategically, it's better for Republicans to let Social Security simmer. As the true problem and choices become more obvious, political support for personal retirement accounts will undoubtedly swell.

Moreover, Democrats will no longer be able to duck the problem. Forced to confront the real choices, the Democratic preference for higher taxes will become manifest. And Republicans usually benefit when Democrats are clearly the party of higher taxes.

It's regrettable that it has come to this. It would have been preferable if Bush had run on a proposal specific enough about the knotty transitional issues to truly claim a mandate. And it would be preferable if Democrats would constructively engage the real choices involved, rather than denying the dimensions and timing of the problem and conducting a scorched earth opposition campaign to anything Bush proposes.

But that's the political reality of the moment. And given that, Republicans would be wise to fold on Social Security reform for now, and wait for financial reality to deal them a stronger hand.