For six decades, Democrats have been proud defenders
of America's most popular government program, Social
Security. But the debate is now becoming so muddled that when
the dust settles, Social Security may well end up partly privatized
with George W. Bush getting credit for saving it.
How could this have happened?
Twenty years ago, it became clear that Social Security
needed adjustment because people were living longer. Unlike a
private retirement account, Social Security keeps sending the
checks as long as you live.
In 1983, Congress slightly raised both taxes and the
retirement age. It also adjusted the cost-of-living formula.
These changes deliberately caused Social Security to
take in more money than it paid out, through about 2013. This
was done to bank reserves so that the system could keep paying
full benefits when the baby-boom generation retires. Then the
system will need to tap those reserves. These modifications will keep
the system solvent until the 2030s.
What then? There are only four choices. Trim benefits,
either directly or by postponing the retirement age; raise taxes; hope
for higher economic growth; or invest Social Security reserves in a
way that increases the system's income.
Conservatives are using Social Security's need for more
money 35 years hence to argue for partial privatization now.
Supposedly, by putting some of the payroll tax receipts that
finance Social Security into personal retirement accounts, rates of
return will be higher. Then, Social Security checks could be
significantly cut but retirees could make up the difference from
But this plan spends the same money twice. Payroll tax
revenues now coming into the system finance Social Security
checks for current retirees. Unless we stop paying those checks,
diverting payroll taxes to new private accounts would cost the
government an extra trillion dollars. It would make Social Security's
solvency worse, not better.
Private accounts also leave individual retirees vulnerable
to the ups and downs of the stock market, and to bad personal
investment decisions. And unlike conventional Social Security,
which pays benefits as long as you live, private accounts can run out.
The Bush approach is so bad that opposing it should be
a political slam dunk for Democrats. But...no.
For one thing, a few high-profile Democrats are willing
to experiment with private accounts. Former Senator Pat
Moynihan, never one to shun the spotlight, has happily and
publicly given President Bush bipartisan cover.
For another, Candidate Al Gore got obsessed with what
he called the "lock-box" (Here you really need to stay awake,
and not just because it's Gore, but bear with me.)
Gore's idea was that the current annual surpluses
coming into the Social Security accounts should be used to pay
down the national debt. Then, when Social Security started
needing more money in a couple of decades, government could
borrow back the money to pay Social Security checks.
Politically, Gore's strategists thought that by putting the
Social Security reserves off budget, and forcing George W.
Bush to take the "lock-box" pledge, they would make it
impossible for Bush to eat into the surplus with a large tax cut. You
can see how well that tactic worked.
Worse, Gore's actual scheme was not a lock-box at all,
but an accounting gimmick. If the idea was to segregate Social
Security surplus funds and invest them separately, that could
have been done. But that's not what Gore offered. Wall Street
gets nervous about large government reserves being invested in
securities. So instead, Gore proposed using Social Security
surpluses to retire government debt and just calling it a lock-box.
In any case, when Bush's tax cut proved much too big,
Democrats could only rail that he was threatening Social
Security. But just enough Democrats had voted for the tax cut
that they shared the blame; the Republicans could insist,
correctly, there was never any lock-box. And nobody
understood what a lockbox was, anyway. Thus, Bush's
overreach yielded only meager benefit for Democrats.
So -- how to save Social Security, politically and
substantively? One straightforward idea voters would grasp:
Repeal the tax cut, reclaim the surplus, and earmark some of it
for the Social Security reserves. A portion of those reserves
could be invested by the Social Security trustees in blue chip
stocks and bonds and income would compound for 35 years.
That would increase the system's rate of return and income, but
without leaving any individual vulnerable.
The privatizers are playing for keeps. Social Security's
champions need something better than a pretend lock-box.