Tuesday, May 10, 2005

Can We Reform Social Security This Year?

In case you haven’t noticed, the effort to reform Social Security is going just about nowhere. President Bush has been campaigning hard for his style of reform. Various Congressional Republicans have floated a wide variety of proposals. Democrats and their allies, on the other hand, have been total obstructionists on the issue, offering no ideas and no real debate. Their strategy pretty much boils down to denying the facts and saying that whatever the Republicans offer is bad.

Let me say up front that I’m going to ignore the libertarian view that we shouldn’t have Social Security at all. While that might fit into the pure conservative idea of utopia, the argument is about two generations late. Social Security has become an integral, but admittedly socialist part of U.S. culture. It’s not going away any time soon. The question is how to deal with it given present and future realities.

Part of the blame for the current impasse goes to the Bush administration. While the administration has been running a political campaign to sell the President’s reform package, it has been very stingy on providing actual details needed by policy makers in Congress. It’s hard to promote a plan that is secret or ethereal. The White House finally provided a detailed plan less than two weeks ago, several months after starting to promote it.

With the issue stalling, the conservative Cato Institute has launched a campaign to “refocus” the debate on “ownership, inheritability, and choice.” These are all good issues, but I’m not sure why solvency isn’t added to these three points, since I think that solvency is the main reason we are having this debate at all.

In the Wall Street Journal, John Fund offers a plan to reinvigorate the reform effort and to steal the Democrats’ best talking points on the issue. The plan has two prongs. The first is to use progressive indexing. More on that below. The second is to immediately set up personal accounts that are invested only in safe government bonds. The President has already included these types of bonds as one of the investment options in his proposal.

The idea with the second point is to take the surpluses projected in the system over the next 12 years and force them into an actual lockbox instead of into government IOUs. Fund says, “Everyone knows that if nothing is done Congress–regardless of which party controls it–will spend every penny of the Social Security surpluses that will flow into the Treasury until 2017, after which the cost of benefits going out will begin exceeding the revenue coming in.”

Fund says that promoting a personal ‘lockbox’ would be a winner with the public at large. People are angry when they find out that they have no personal Social Security account and that their future benefits are determined by political whim. The idea of each person having his or her own account is quite popular, but opinion is quite mixed on investing those funds in private instruments.

By taking “privatization” off the table, Democrats would no longer be able to argue that private accounts would be gambling with your future since all investments would be in government bonds, which are just about the lowest risk instruments around. Fund hints that this could be a temporary measure that would open the door for eventual investing in other types of instruments. Indeed, I think that once people got used to having personal Social Security accounts, many would begin to clamor for other investment options similar to what they have with their 401k accounts.

Democratic investment banker Robert Pozen developed progressive indexing. It is intended to ensure that people at the low end of the economic spectrum are kept above poverty level. However, their increased benefits would be paid for by decreased benefits for everyone else. Can you say “more socialism” children?

Benefits are currently tied to the wage index, so benefits increase at the same rate as wages. However, the wage index climbs at a higher rate than the general inflation index. Some argue that benefits should be tied to the lower inflation index. Critics of this idea note that the wage index is directly tied to actual wages, while the inflation index is a complicated multi-tiered equation that is not closely tied to what real people are experiencing in their actual costs.

Progressive indexing would tie benefits for the lowest 30% to the higher wage index, while tying benefits for the remaining 70% to the lower inflation index. The projected result is a cut in the Social Security deficit from $3.7 trillion to $1.1 trillion over 75 years. Some on both sides of the aisle argue that this plan robs the middle class, but most Democrats aren’t arguing much because robbing from the rich to give to the poor has long been a staple of liberal politics.

Fund’s plan has definite bipartisan appeal. It gives everyone a safe personal account and it takes care of the poor. But the big problem with his plan is that it would take the money going into Social Security out of the budget. It would force the administration and Congress to own up to the true budgetary deficit we face. Congress would have to give up spending the money that is going into Social Security or at least count it as part of the national debt. That could make it a political hard sell. But Fund argues that the political stars are sufficiently aligned to make the plan achievable this year – with the right kind of leadership.

Fund focuses mainly on the political viability of his reform plan. He doesn’t provide much in the way of financial analysis, so I am left to wonder if his plan would actually fix the impending insolvency of the system. I also wonder if the right kind of leadership will be forthcoming to make the plan work. If it achieves solvency, it is less than what I would like, but it is probably the best that can be expected. If it doesn’t achieve solvency, why do it?

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