Promise of Social Security Reform Puts Bush on Track for 2004

December 17, 2003

With several favorably scored proposals on the table, President Bush can reacquaint himself with fiscal conservatives by campaigning on Social Security reform in 2004, according to Andrew Gossman in his article, "Social Security Reform: Saving the System, Saving Grace." Highlights Gossman's article follow:

"After years of talking about it, the Bush administration looks to be gearing up for a push on Social Security, telling reporters that 'it shouldn't surprise anyone' for the issue to move to the fore in coming months. Their timing couldn't be better.

"Fiscal conservatives' rapidly growing dissatisfaction with the administration is no secret…. But in spite of current enmities, strong movement on Social Security reform could mend fences quickly with small government conservatives … for whom reform has long been an over-the-horizon goal.

"According to its own trustees, the Social Security system is set to start running a deficit in 2018, when baby boomers will still be in the early stages of retirement. The American Enterprise Institute's Jagadeesh Gokhale and Kent Smetters estimate that Social Security faces a $7 trillion 'fiscal imbalance,' that is, the shortfall in funding to pay future benefits. Short of major change, policymakers have the choice of raising taxes to cover this shortfall, cutting benefits that have already been promised, or some combination of the two. Maintaining current payroll taxes and benefits is not an option under the pay-as-you-go system.

"That's why individual Social Security accounts holding market investments— much like today's 401k accounts—aren't so radical a solution. But, as ever, the devil is in the details, and the small detail that makes reform really complicated is how to finance the transition so that those who have already paid into the Social Security system get the benefit due them even as younger workers divert more and more of their contributions out of the general pool and into individual accounts.

"One solution has been to keep individual accounts small. The President's Commission to Strengthen Social Security, for example, proposed that accounts be funded by 2 to 4 percent of wages, to be carved out of the current 12.4 percent Social Security payroll tax. But considering the benefits of individual accounts—especially higher rates of return, greater work incentives (because workers would be keeping more of their wage), and the ability to bequest account assets—bigger is better.

"And once again, the bigger-is-better crowd has had its ideas vindicated. Last Monday, Steve Goss, the Social Security Administration's chief actuary released a memorandum estimating the financial effects of a reform plan developed by Peter Ferrara, a senior staff member of the Reagan and first Bush administrations. Goss's numbers show a complete elimination of the Social Security deficit over time, as benefit obligations shift to beneficiaries' own personal accounts, and an elimination of the current system's fiscal imbalance. Still, the Ferrara proposal has big accounts: 6.4 percent of wages—more than half the current Social Security tax—on average.

"To woo liberals, Ferrara has added several sweeteners: progressivity and a benefit guarantee. While workers can contribute 5 percent of their wages to their personal accounts, they are able to contribute 10 percent of their first $10,000 in income, giving lower-income workers a greater opportunity to invest. And while workers would be free to invest their account assets in any of a number of stock and bond funds meeting Treasury Department standards, they would enjoy a safety net, set at the current level of Social Security benefits.

"Though Ferrara's plan has received much attention this week (especially in the Wall Street Journal), interest is picking up in others'. Rep. Jim DeMint quietly released a plan earlier this year that features big accounts (from 3 to 8 percentage points of income) and that has been scored even more favorably than Ferrara's in terms of the temporary debt that it would impose and its risk to the government's finances. DeMint's is also progressive, like Ferrara's, and features a benefit guarantee. The Cato Institute is said to be in the final stages of crafting its own proposal, which will likely be attractive to those seeking big accounts. And just last month, Sen. Lindsay Graham released a plan with smaller accounts (4 percentage points of income) and an option for workers to stay in the current system.

"Expect a proliferation of plans in coming months, as the issue gains momentum. And expect much effort to be spent analyzing each, breaking them into their component parts, and trying to craft a piece of legislation with economic and, as is too often overlooked, political sustainability.

"None of this is lost on the President and his advisors, judging by their talking points in recent weeks. Emboldened by its success with Medicare and the roaring economy, the White House is determined to get the President's aggressive domestic policy agenda on track. … The President knows that conservatives are proceeding carefully and watching for it as the January speech draws nearer."

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