Bush Social Security Reform Effort Underway

A couple of long stories today in major papers explain why this is going to be an uphill battle all the way.

Analysts Call Outlook for Bush Plan Bleak (WaPo)

President Bush signaled yesterday that he would add personal investment accounts to the Social Security system, simplify the tax code without raising taxes and cut the budget deficit in half, all before he leaves office in 2009. Ambitious as those promises are, they may be mathematically impossible, budget and policy analysts say. “It doesn’t seem like we’re going to see any tightness in U.S. budget policy anytime soon,” said Rebecca Patterson, senior currency strategist at Wall Street giant JPMorgan Chase. Bush pledged early this year to halve the deficit in five years, a promise he renewed yesterday. “I would suggest [deficit hawks] look at our budget that we’ve submitted to Congress, which does, in fact, get the deficit down, cut in half in five years,” Bush said.

But in an independent analysis of that budget, the nonpartisan Congressional Budget Office concluded it would not fulfill that promise. The deficit in fiscal 2004, which ended Sept. 30, was $413 billion. Under Bush’s plan for spending and taxes, the deficit would be $258 billion in 2009. If anything, that may understate the size of the deficit in coming years because it does not include any additional costs for the wars in Iraq and Afghanistan. The Pentagon is expected to seek an additional $70 billion early next year.

Moreover, the president’s budget does not include the cost of a Social Security reform plan that includes the personal investment accounts Bush is demanding. Under such a plan, workers would be allowed to divert one-third or more of their share of Social Security taxes into stocks, bonds or other investments. Because the diverted money would otherwise have gone to existing Social Security beneficiaries, the funds would have to be made up through additional government borrowing or spending cuts. A CBO analysis of one of the plans drafted by Bush’s Social Security commission concluded the near-term cost would be $104.5 billion in 2005, rising to $146.6 billion in 2009. “It’s all nice to propose personal accounts, to say you’re not going to cut benefits for retirees, but then you’ve got to make the tough choices,” said Rep. Jim Kolbe (R-Ariz.), a proponent of overhauling Social Security. “You have to accept short-term transition costs that are going to hit the budget deficit. It’s just a matter of being responsible.”

Given the challenges of the president’s Social Security plan amid record budget deficits, some budget analysts had hoped Bush’s simultaneous call to simplify the tax code could be used to raise revenue. They reasoned that taxpayers may be willing to dig a little deeper in exchange for a tax system they see as simpler and fairer. But Bush made it clear yesterday that was not his intention. Any tax code changes would have to bring in the same amount of revenue as the tax code they would replace, he said. “If there was a need to raise taxes, I’d say, ‘Let’s have a tax bill that raises taxes,’ as opposed to ‘Let’s simplify the tax code and sneak a tax increase on the people,’ ” he said. “It’s just not my style. I don’t believe we need to raise taxes.” To cope with the cost of his agenda, Bush said he would impose “spending discipline” on Congress and spur economic growth to boost tax revenue. But he has also made it clear he would not cut defense or homeland security spending, and he has promised more spending for education.

Privatized Accounts Moved to ‘Fast Track’

President Bush on Thursday set the stage for a monumental legislative battle by placing Social Security reform at the top of his second-term agenda, even though he acknowledged that no long-term fix would be pain-free. Although he did not embrace a specific blueprint, Bush said the starting point for discussions was a set of recommendations that in all likelihood would run up the federal debt and reduce government-paid benefits for workers who chose to set up private retirement accounts. “There will be costs,” the president told reporters during his first postelection news conference. “But the cost of doing nothing … is much greater than the cost of reforming the system today.”

Members of Congress and independent policy analysts said the president’s remarks signaled a willingness to spend his newly won political clout on an issue so sensitive that leaders had long been reluctant to grapple with it. “He is getting ready for bold action on Social Security. He’s getting people prepared,” said Rep. Paul Ryan (R-Wis.), an advocate of private retirement accounts. “It’s going to be an enormously bloody fight,” predicted Michael Tanner, director of the Project on Social Security Choice at the libertarian Cato Institute. “But the political climate really has changed, and it is possible to do this now…. It’s on the fast track.”

Because revising Social Security and Medicare generally requires unpopular changes in taxes or benefits, the entitlement programs for the elderly have long been described as the “third rail of politics” — fatal to politicians who touch them. But Tanner said Bush might have proved otherwise. “The third rail has lost a lot of its juice,” Tanner said. “If you look at the election results, this doesn’t seem to have hurt the president. He even carried seniors.”

In the Senate, at least, Republicans seemed to share that assessment. Sen. Lindsey O. Graham (R-S.C.), a leading proponent of Social Security revision, said Bush had personally assured him he would make this a top priority of his second term. He said he considered it in keeping with Bush’s penchant for big initiatives. “He has a track record of taking a big idea and working hard to deliver it,” Graham said. Another reform proponent, Sen. John E. Sununu (R-N.H.), said he thought the outlook for action was much improved because of the big GOP gains in the Senate.
“I would hope a stronger majority will encourage us to be bolder and identify priorities that may be very challenging like Social Security,” Sununu said. “Pushing that issue is not a matter of partisanship, it is being willing to use political capital to tackle an issue everyone agrees is important.”

Among House Republicans, however, there were signs of skittishness. They already are worrying about the 2006 elections because, historically, during a president’s second term, his party loses seats in Congress at the midterm elections. A senior House Republican leadership aide who requested anonymity predicted problems of two sorts: resistance from members who didn’t want to tamper with Social Security at all, and qualms on the part of fiscal conservatives who worried about the transition costs. Transition costs refer to money the government would lose — and would need to make up to pay current benefits — when workers retain some of the money they now pay in Social Security withholding taxes and instead put it into the private investment accounts Bush favors.

Independent analysts have estimated that diverting payroll taxes into private accounts, as envisioned by a reform commission he appointed in 2001, would reduce government revenue by as much as $1 trillion to $2 trillion over the next 10 years. Although that loss would be offset by future reductions in government payouts, Washington probably would make up the difference in the meantime by borrowing even more at a time of already sizable budget shortfalls. “It’s problematic,” the House aide said. “That doesn’t mean we won’t get it done.”

The transition costs for this program, all acknowledge, will be massive. The alternatives, though, are even more bleak.

  • The status quo. This is unsustainable without a massive influx of young people into the system willing to shell out an increasing share of their income to comparatively wealthy elderly folks retiring at what is now a relatively young age.
  • A sustantial increase in the retirement age. When FDR established this program in 1932, 65 was very old. Indeed, it was past the expected lifespan. Now, people who reach 65 can expect to live another 15-20 years. We’ve already gradually increased this for the out years. But raising it to, say, 75 will be incredibly difficulty politically and doesn’t take into account the fact that even 65 is relatively old for those in more labor intensive occupations.

My guess is that we’ll wind up with a modest increase in the retirement age and some slight privatization. It won’t be much, but at least it’ll be a start.

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James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College. He's a former Army officer and Desert Storm veteran. Views expressed here are his own. Follow James on Twitter @DrJJoyner.