Shortly after his re-election, President Bush said: Hey, were going to reform Social Security, and I really mean it this time. He also wants to move quickly. In mid-January he told reporters that he wants his proposed reforms to be approved by Congress within the first five months of this year. To these flourishes, Congress and the rest of the country should reply: Not so fast, Mr. President. We need much more discussion of changes in the Social Security system and many more hard facts than have been available so far.
The Social Security system was created in 1935 primarily to provide for the elderly who had lost both jobs and savings in the Great Depression. It was sold as a pension program, but in fact it was a welfare program, since its early beneficiaries received benefits even though they had put little or no money into it. Younger workers were told that their contributions were being set aside for their retirement, when in fact most of the money was being used to take care of their elderly parents and grandparents. Likewise, when Medicare was instituted in 1966, benefits were immediately given to those who had paid nothing into the system.
This might have gone on forever if modern medicine and birth control had not altered the ratio of workers to retirees. Modern medicine increased the life expectancy of the elderly (and therefore the number of years during which they will receive Social Security and Medicare), and birth control decreased the number of workers available to support retirees. Furthermore, most people enter the workforce later today than they did in 1935, because they spend more time in school. Medicare is in much more trouble than Social Security because health care costs, especially for the elderly, are rising much faster than wages. Over the years, the government responded by increasing payroll taxes to the point that many workers now pay more FICA tax than income tax.
Because Social Security (unlike Medicare) takes in more money in payroll taxes than it distributes in benefits, it has built up a trust fund of more than $1.5 trillion. Since this money is loaned to the federal government, if the fund were drawn down, the government would have to find other lenders (and pay higher interest rates), increase taxes or cut programs like Medicare.
The American Association of Retired Persons thinks Social Security can be kept solvent by gradually increasing taxes on workers. Others argue that since people are living longer, the retirement age should be raised. And those who see Social Security as a quasi-welfare program argue for reducing benefits for the rich elderly. After all, much of the wealth in this country is owned by people over 65. Any bipartisan compromise on Social Security and Medicare reform would have to include all these elements, but at this point the Republicans refuse to yield on taxes, and the Democrats refuse to give in on benefits.
But the presidents proposal to privatize Social Security is much more radical than reforms that have been proposed in the past. It would allow and encourage younger workers now entering the system to divert a third or more of their payroll taxes into personal accounts and then invest these funds in securities markets as they choose. The president believes that this will foster an ownership society, where everyone invests and takes responsibility for the future.
If these workers are as shrewd as Hetty Green or Warren E. Buffet, their investments might guarantee them a comfortable old age. But if they have no expertise or time to monitor the market, they will end up as desolate as the folks who bought Enron stock. Indeed, they might even fall below the poverty line, since the second element in the presidents design would be a substantial reduction in the benefits paid out by Social Security to these workers when they retire. This is high-stakes gambling without a safety net.
The reform would also hit the federal government with a tidal wave of red ink. Paying for the transition costs to the new system would require borrowing $2 trillion over the course of two decades. Because of the presidents tax cuts and the war in Iraq, Washington is already drowning in red ink. There is no guarantee that interest rates will remain low through the next couple of decades.
Four years ago, President Bush often praised compassionate conservatism. Nowadays, he promotes the ownership society. But the nation should not lose sight of that earlier ideal. There are millions of elderly citizens for whom Social Security supplies most or all of their income. A reform that heavily cuts the benefits of these poor might be called conservative; it would surely be called cruel. Nor should the Social Security safety net be shredded, lest unlucky future generations end up on the streets with a tin cup, like their predecessors in the 1930s.