Social Security: Round 2

Privatizers may be flailing, Republicans may be seeking compromise deals — but the Social Security battle is far from over.

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At the risk of jinxing things, we can fairly say that President Bush’s plan to privatize Social Security is teetering on the brink of collapse. The latest Wall Street Journal/NBC poll, released last week, reported that only 40 percent of respondents still favor privatization—a number that has dropped every time a new poll surfaces. Americans, it seems, no longer believes that private accounts will solve Social Security’s deficit problems—and it shows. The president’s recent campaign-style trip to sell privatization in New Hampshire, for instance, garnered so little attention that White House aides had to collect hundreds of empty chairs before Bush took the stage at one event. Not that a full crowd would have helped matters: When Rep. Jim Kolbe (R-AZ), a major advocate of privatization, tried to stage a recent town hall meeting on the subject, he ended up “[having] to pacify a deeply divided crowd,” according to one report.

The apathy and anger certainly shouldn’t shock anyone. Thanks to a major push by Democrats, liberal think tanks, and, yes, bloggers, privatization’s downsides are becoming increasingly clear. As the Center for Budget and Policy Priorities detailed—and as liberal pundits and politicians have repeated ad infinitum—Bush’s still-hazy privatization proposal would require around $4.5 trillion in borrowing over the next 25 years, and would end up decreasing benefits across the board. To make this more concrete, Sen. Charles Schumer (D-NY) recently put out a Social Security Calculator to make those cuts concrete. A 23 year old making $30,000 a year today could expect to retire on $19,000 a year under the current Social Security program. With private accounts, he or she would get only $13,000 a year, a whopping 32 percent cut. A vague feeling of “ownership” doesn’t quite make up the difference.

Liberals haven’t quite won yet, but they’ve certainly seized the high ground. The important part now is to remain united. If not a single Senate Democrat supports privatization, it will be impossible for Republicans plotting to hack retirement benefits to hide behind the veneer of “bipartisanship”. In January, the Wall Street Journal reported that Senate Republicans had told Karl Rove they were “scared to death” of touching the hugely popular program. If the Democrats can keep themselves unified and maintain public support, they can keep the GOP too scared to privatize. (Josh Marshall of is currently keeping a watch on those Democrats in danger of backsliding.)

Nor should the Democrats compromise on any sort of private accounts right now. Rumor has it that some Senate Democrats—Joe Lieberman (D-CT) perhaps—have warmed up to a plan put forward by Sen. Lindsey Graham (R-SC) that would finance the transition to private accounts by lifting the cap on payroll taxes. (FICA taxes are currently levied only on the first $90,000 of income; lifting the cap would hence tax the upper-middle class.)

Even if it’s one of the more responsible GOP proposals out there, it’s an awful idea. A Center on Budget and Policy Priorities analysis found that the Graham plan would still entail trillions in borrowing costs over the next 50 years and likely lead, in the end, to reduced benefits all around. And it would no doubt endure further mangling at the hands of Congressional Republicans. Recall the lesson of the 2003 Medicare bill: A sensible idea (offering drug coverage for seniors), borne of bipartisan compromise, became a trillion dollar handout to insurance companies, rife with monstrosities. Democrats could expect a similar fate for the Graham plan: The House leadership has already flatly ruled out raising taxes, and would likely strip out many of the bill’s saner provisions.

The same goes for add-on accounts. It’s true that President Bill Clinton and other liberals throughout the 1990s wanted to offer private accounts on top of guaranteed benefits from the Social Security system (as opposed to diverting payroll taxes away from the system, as Republicans have proposed). But even that might not survive the legislative process. Add-on accounts, meanwhile, could give the GOP an excuse to cut traditional benefits elsewhere. (“Gee, now that we have private retirement accounts; what do we need Social Security for?”) No, the Democrats first and only job, at this point in time, should be to preserve those guaranteed benefits.

But that’s just the short-term victory. In the long run, of course, privatization advocates aren’t going to fade away. They’ve already put together a formidable coalition of think tanks and business groups—like the 40-member Alliance for Worker Retirement Security, representing an array of brokerage firms and financial companies—that plan on touting privatization for decades to come.

The terrain isn’t entirely unfavorable for defenders: the vast majority of respondents in the Wall Street Journal/NBC poll valued Social Security’s “guarantees for the future” rather than the Republican vision of “more responsibility and personal control.” On the downside, 52 percent still believe the program faces either “a crisis” or “serious trouble.” None of this is true: the system will continue paying out full benefits until 2042, according to the Social Security Trustees’ Report, and thereafter, the payable benefits will still be higher in real terms than they are today. The median 20-year-old today can, after all, expect $19,000 a year from the program upon retiring, even if the Trust Fund does run out. Hardly a crisis. Still, the confusion needs to be dispelled.

One bright spot here is that, over the next few years, the program’s long-term outlook will almost certainly improve, thanks to higher growth over the last few years than was predicted by the last Trustees’ Report. In fact, David Langer, an actuary following the Social Security debate, recently observed that the Trustees’ “intermediate-cost projections”—the ones saying that the Trust Fund will go bankrupt by 2042—have, historically, almost always underestimated the true health of the program. As it turns out, the Trustees’ “low-cost projections”—under which the program can pay promised benefits forever—have tracked actual economic growth more closely. So not only is there no “crisis”; the slight problems predicted by a “bankrupt” Trust Fund might never even occur. Waiting to see what happens is smart policy.

On the other hand, Democrats have worried about the consequences of proposing nothing at all. As Mark Schmitt, a senior fellow at the New America Foundation, recently pointed out, part of the Social Security battle for the GOP involves “putting the Democrats in a position where they do nothing but defend an old and boring program for most of the year.” For the most part, this fear may be unfounded. Another recent Wall Street Journal poll found that fully 60 percent of Americans want Democrats to make sure Bush and his party “don’t go too far.” Only 34 percent wanted the minority party to “work in a bipartisan way” to help advance the GOP agenda. Social Security may be “old and boring,” but it’s hugely popular, and there’s a mandate out there to defend it.

But perhaps there’s a compromise. A number of small and relatively painless tweaks can be undertaken today to strengthen Social Security without actually raising taxes or slashing benefits. The government could force all state and local employees to start paying into the system—over 3.7 million such workers don’t pay into the system, even though many of them eventually leave government and receive Social Security benefits from other work. Such a move, according to a 2002 estimate by the Social Security Administration, would eliminate 11 percent of the program’s long-term shortfall. President Bush’s proposed immigration bill, meanwhile, would also shore up the system by bringing a lot of current illegal migrants onto payrolls and forcing them to pay FICA taxes. It’s not an overhaul, but an easy step in the right direction.

After that, sit tight. Radical reform or excessive panicking will only undermine confidence in the program. Social Security will be under siege for a long while—even if Bush’s privatization scheme sputters—and Democrats need to start thinking not just about today’s battles, but about the many battles yet to come.


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