Wessel: Democrats Divided on Social Security Solution

January 14, 2005

Democrats—who are largely opposed to President Bush's plans to partially privatize Social Security—generally fall into three camps on the issue, says David Wessel in a Wall Street Journal column (registration required). The first group says that there is no big Social Security problem, and that waiting a few years before considering tax raises or benefit cuts won't harm the program. The second camp admits that there is a Social Security problem, but that modest tax increases—not private accounts—are the answer. The third group says that Social Security needs reform and Democrats shouldn't be afraid of private accounts, perhaps in the form of a "universal 401(k)," with contributions made by low-income workers matched by the government. Wessel's article follows.

"Most Democrats dislike President Bush's still-vague proposal to allow workers to divert some Social Security payroll taxes to private investment accounts, make the Treasury borrow heavily to pay benefits to today's retirees and water down benefits that current law provides for future retirees.

"The proposal does offer Democrats an easy target. The president's private accounts aren't really intended to fix Social Security. Rather, they are a way to advance his deeply held belief in the value of a more individualistic 'ownership society.' The president measures Social Security liabilities not over the actuaries' usual 75-year horizon but over eternity—which generates a frightening $10 trillion in unfunded promises. But when he measures the cost to the Treasury of his tax cuts, he prefers the five-year horizon. The president has, at least rhetorically, discovered fiscal rectitude, but bets the bond market will absorb hundreds of billions in new Treasury borrowing without pushing up interest rates.

"So what would Democrats do if they were in charge? They divide into three camps.

"The first says flatly: There is no big Social Security problem.

"As the left-leaning Economic Policy Institute puts it, 'Social Security is not going broke anytime soon.' It's true that Social Security actuaries say that taxes earmarked for the program will more than cover promised benefits until 2018, that taxes plus interest on the trust fund's Treasury bonds will cover promised benefits until 2028 and that the trust funds won't run dry until 2042. Social Security isn't on fire; another year of inaction won't destroy it.

"But that hardly argues for deferring repairs. Waiting to slash benefits or raise taxes until the bulk of the baby-boom generation is collecting checks is imprudent and politically impossible. If you have termites, you don't wait for the house to collapse.

"Others say Social Security actuaries are overly pessimistic. The actuaries actually make optimistic, pessimistic and 'intermediate' 75-year projections; the latter gets all the attention. It assumes that growth in productivity, or output per hour of work, will fall below recent encouraging trends and that immigration will abate. Tweak the assumptions, and projected Social Security revenue grows so much that it hardly needs a bandage. Any 75-year forecast is surely wrong, and productivity does appear to be on the rebound. But hoping for the best hardly seems prudent.

"The second camp says: There's a problem, but the fix isn't private accounts or radical surgery.

"With admirable precision (White House: take note) Peter Diamond of the Massachusetts Institute of Technology and Peter Orszag of the Brookings Institution show how. They'd rely heavily on raising taxes, both the payroll tax rate and income subject to tax, but also would reduce benefits for those born after 1949 to reflect lengthening life expectancy. Reflecting their political druthers, they'd take more from higher-income workers and give more to lower-income workers.

"Their numbers add up, and don't hide the pain. They'd lift today's 12.4% payroll tax, split between worker and employer, to 13.7% by 2045 and 15.2% by 2075. Don't like that? They suggest reinstating the estate tax as an alternative. (Watch for Democrats to float that.) 'The upside is that taxes would have to rise only relatively slowly,' says Jeff Lemieux of centrists.org, a think tank. 'The downside is that the tax increase would be permanent. But the authors are to be commended for their honesty. This is the first Social Security reform proposal that is fully 'paid for.''

"All this honesty has given the Diamond-Orszag plan few advocates in Congress. And, perhaps because the stock market has been so fickle, there's not much talk about reviving former President Clinton's plan to invest the Social Security trust fund in stocks. (Watch this: It's sure to return.)

"The third camp says: There's a problem, and Democrats needn't be allergic to private accounts.

"'By anathematizing privatization plans but not offering a progressive alternative, Democrats risk ceding the initiative entirely to the Republicans who have what purports to be a reform even if it's flawed,' says Will Marshall, president of the centrist Democrats' centrist Progressive Policy Institute. After all, even Sweden has private accounts, though—unlike Mr. Bush's—they're mandatory.

"Mr. Marshall doesn't have a fleshed-out proposal. Democrats of his persuasion are casting about for one. He would 'retool' Social Security so it encourages and helps Americans to save more and build wealth. Edward Gramlich, before he joined the Federal Reserve Board, crafted a plan to tack private accounts on top of existing Social Security. He got few takers. Gene Sperling, the former Clinton aide, talks up a 'universal 401(k),' a private savings account, perhaps structured so the government would match savings by low-income Americans, alongside Social Security.

"The president eventually will put forward some details about his proposal, if he really wants to get it down. Democrats are guaranteed to attack it. It'd be useful if they had an alternative to offer, as well."

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