Just two days after winning reelection, President Bush announced that reforming Social Security would be a top priority of his second term. In doing so, he can plausibly claim a mandate for reform.
While the election hardly turned on Social Security, there were sharp differences between President Bush and Senator Kerry over the future of the program. Bush’s stump speech contained a call to allow younger workers to privately invest a portion of their Social Security taxes through individual accounts. In television ads and on the campaign trail, Kerry attacked the president for planning a “January surprise” that would “privatize” Social Security in a huge giveaway to Wall Street.
Kerry’s arguments did not carry the day. The president stomped on the third rail of American politics and lived. In fact, not only did the Social Security issue not hurt the president (he carried voters over 65), it likely added to his margin of victory. Exit surveys show that 56 percent of voters supported individual account proposals as long as current retirees and near retirees received all promised benefits. Overall, only 32 percent of voters were opposed.
The challenge now is to bring this widespread support for individual accounts inside the Beltway. It is promising that two rising stars of the Democratic Party, Rep. Harold Ford (D-Tenn.) and Senator-elect Barack Obama (D-Ill.), have both expressed interest in personal accounts. Bush also benefits from the addition of four new GOP senators who campaigned in favor of personal accounts.
As the president proceeds, here are a few things he should keep in mind:
Reform can’t wait. In less than 15 years, Social Security will begin spending more on benefits than it will take in through taxes. The Social Security Trust Fund has no real assets, a fact that President Clinton’s 2000 Economic Report of the President makes explicit. The system faces unfunded liabilities of more than $11.9 trillion in present value terms, $26 trillion in constant 2004 dollars.
Every two-year election cycle that we wait costs an additional $320 billion.
Solvency is not enough. The goal of Social Security reform should be to provide workers with the best possible retirement option, not simply to preserve the current system. If solvency were the only goal, that could be accomplished by raising taxes or cutting benefits, though this would be a bad deal for younger workers.
A successful Social Security reform will result in a solvent, sustainable system. It will improve Social Security’s rate of return, provide better retirement benefits, and treat women, minorities, and low-income workers more fairly.
Size matters. Many proposals for Social Security reform would allow workers to invest only a small portion of their payroll taxes.
This “start small” approach is a mistake. The whole point of individual accounts is to take advantage of the higher returns available from private investment, using what Einstein reportedly called “the most powerful force in the universe” — compound interest.
Small accounts fail to take full advantage of the compounding dynamic. Moreover, small account proposals will not allow low- and middle-income workers to accumulate meaningful wealth or achieve the other objectives of reform.
Individual accounts should be as large as feasible, ideally at least half of payroll taxes. There are several proposals in Congress now, including one by Rep. Sam Johnson (R-Texas) based on work by the Cato Institute, that show how this can be done in a fiscally responsible way.
Higher returns, lower costs. Individual accounts will create a better, fairer and more secure retirement system. But they cannot create miracles. They will provide higher retirement benefits than Social Security can pay, but they will not make everyone into millionaires. They will help solve Social Security’s financial crisis and save taxpayers trillions of dollars over the long run.
Under a system of personal accounts, total costs to the government will be significantly reduced, although the timing of those costs will shift forward. President Bush should not pretend otherwise.
If Congress adopts personal accounts, it will have to find a way to pay for those costs. One possibility, which would be smart politics for the GOP, would be to end corporate welfare and reallocate that money to Social Security reform.
Ownership is the key. The theme of the president’s acceptance address at this year’s convention was the “Ownership Society.” Ownership is critical in the debate over Social Security.
Most Americans are not aware that in the 1960 case of Flemming v. Nestor, the Supreme Court ruled that we have do not own our benefits. Under the current system, what you get back at retirement is entirely up to 535 politicians.
President Bush has vowed to spend political capital to switch to a better, fairer system. All Americans will be better off if he succeeds.