The battle over Social Security

Bush's Social Security plan is in deep trouble. But if he's slick enough to change course, Democrats could be the big losers.

By Farhad Manjoo
Published February 15, 2005 12:40AM (EST)

Is the White House's plan to privatize Social Security already sunk? Just a week after George W. Bush used his State of the Union address to launch his ambitious plans for the retirement program, his ideas already seem to be foundering with the public and in Congress. Bush spent the second half of last week touring a half dozen red states in an attempt to pressure Democratic senators to sign on to his scheme. On Thursday, he also talked up the plan in Pennsylvania and North Carolina.

So far the gambit has yielded little success; even Democrats, who've previously been friendly to Bush's domestic policies, are now expressing unambiguous opposition to this idea. Indeed, Bush doesn't even have all the Republicans with him. A few in the GOP already oppose the Bush plan, such as Sen. Olympia Snowe of Maine, who sits on the Committee on Finance, critical to passage of the plan, while many refuse to say where they stand, including Sen. Chuck Grassley, R-Iowa, the Finance Committee's chairman.

The chances that Congress will quickly pass the kind of plan that Bush has outlined -- one in which workers would be allowed to divert their Social Security taxes into private accounts invested in the stock market -- are now "slim to none, and slim has just left the building," says Norman Ornstein, a veteran Congress watcher at the right-leaning American Enterprise Institute.

But as bad as things may look for Bush, Ornstein and other opinion makers don't believe that Social Security reform is toast. Indeed, if Bush plays his cards right, they point out, and reshuffles his proposal with ideas long endorsed by centrists on both sides of the aisle, the president could actually emerge with some good legislation - a plan that doesn't privatize Social Security, as his current proposal does, but instead fixes long-term problems with the retirement program.

It's true that right now the White House seems unlikely to adopt a more palatable plan. But a law that institutes actual reforms to Social Security would be pretty good for the country, and would be seen as a win for Bush and probably a loss for Democrats. Which is exactly why, if the political outlook for the current plan remains dim, Democrats should begin to worry that Bush may become uncharacteristically reasonable.

At the moment, it's not hard to see why lawmakers are wary of supporting Bush's reform: The public is wary of it, too. While polls taken just after the State of the Union speech showed strong support for the president's plan, recent surveys have not looked encouraging for the White House. A Washington Post poll released Thursday suggests that while a slim majority of Americans supports Bush's idea to allow workers to invest payroll taxes in the stock market, the support is "weakly held." When told that the Bush plan would require trillions of dollars in transitional costs, most people changed their minds.

Barbara Kennelly, a former Democratic House member from Connecticut who now heads the National Committee to Preserve Social Security and Medicare, an advocacy group that opposes the Bush plan, says that as recently as a couple of months ago she feared that Bush would get his proposal through Congress in a matter of weeks. In fact, she says, Bush had been banking on speedy approval. "The president would very much like to have this go through quickly, because it really is the kind of case that the more you find out about it, the worse it gets." Any hesitation would give opponents time to educate the public about its flaws. Which is now happening.

What caused the slowdown? "I think it can be summed up in two words: deficit financing," Kennelly says. In Washington during the past week, she notes, everyone had a single fear: ballooning federal deficits. The White House's budget proposal, released on Monday, may call for enormous cuts to many vital social programs, but nobody who's serious about such issues believes the budget brings the nation any closer to fiscal responsibility. Lawmakers also recently got their first taste of the true costs of the Medicare prescription-drug law that Bush signed two years ago. At the time, the White House told Congress that the plan would cost $400 billion for 10 years; on Tuesday, it acknowledged that the Medicare plan would require at least $732 billion, and possibly more than $1 trillion, between 2006 and 2015.

The federal government's books are bathed in red ink: Over the next couple of decades, we'll need to pay for the Iraq war, Homeland Security and Medicare drugs. Bush also wants his expensive tax cuts to be made permanent. In addition, both Republicans and Democrats want to jettison the Alternative Minimum Tax, which would cost a few hundred billion dollars.

So how, lawmakers are wondering, can we pay the trillions necessary to set up the new Social Security private accounts? "When [former Treasury Secretary Paul] O'Neill would sit with Alan Greenspan in the year 2000 and talk about privatizing Social Security, they could say we'll take a trillion out of the surplus and finance it with that," Kennelly says. "Those days are long gone."

Supporters of Bush's plan have long maintained that if the president takes his case to the public, Americans will force their representatives to support private accounts, no matter what the cost. From tax cuts to the Medicare bill to the war in Iraq, Bush has shown a near-magical capacity to convince Americans of the rightness of his policies, however wrongheaded they may appear on paper. But convincing Americans to support tax cuts may prove much simpler than persuading them to make drastic changes to Social Security, a program that enjoys broad support across the nation.

Moreover, the White House propaganda machine hasn't been firing on all cylinders lately. In contrast to the simple plan that Bush put forth in his State of the Union speech, the administration's actual proposals, revealed in a series of press briefings, are nearly as Byzantine as the tax code and seem unlikely to be embraced the average worker.

Even the president doesn't appear to understand his own plan. In a much-mocked bit of campaigning gone awry in Tampa last week, Bush fumbled his way through an explanation of it. "There's a series of parts of the formula that are being considered," he told an increasingly baffled audience. "And when you couple that, those different cost drivers, affecting those -- changing those with personal accounts, the idea is to get what has been promised more likely to be -- or closer delivered to what has been promised." He added: "Does that make any sense to you? It's kind of muddled."

Many economists themselves see the Bush plan as muddled -- and say it doesn't add up for retirees. People who choose to invest in private accounts must first accept a cut in future Social Security benefits, and that cut must equal the size of their investment plus 3 percent. Those who go the private-account route must be sure that the accounts will yield at least a 3 percent gain over inflation -- which is certainly not guaranteed. As the Washington Post points out, few economists believe that stocks will return substantially more than 3 percent above inflation over the next 50 years or so. That's because as people of the baby-boom generation begin to retire in the coming decades, they'll start selling off their 401Ks, causing stock prices to lag.

The White House hasn't said whether it wants to cut traditional Social Security benefits, but it has hinted that it will. Bush is fond of telling people that Social Security is headed toward bankruptcy. But economists call that a lie. In fact, last week, Bush was forced to admit that private accounts, by themselves, would do nothing to affect the long-term solvency of the program. The only actions that will improve Social Security's balance sheet is an increase in payroll taxes or a reduction of benefits, or a combination of the two. Bush says that he'll consider every proposal to make Social Security solvent except for raising taxes. What this means is that as far as Bush is concerned, the only way to reform Social Security -- the only plan that's on the table -- is reducing benefits.

In other words, Bush's private-accounts plan is complex, risky and expensive, and it would require cuts in benefits to Social Security. It's no wonder that politicians aren't lining up to support him.

But Ornstein says the president can win back Republican apostates and even sway Democrats by incorporating the best of past Social Security proposals. Those include eliminating the wage cap on payroll taxes, reducing benefits for wealthy people, and creating private accounts as an add-on to Social Security, as outlined by Gene Sperling, Bill Clinton's economic advisor. Another politically easy move would be to institute a program known as KidSave, which would give every child born in America an investment account seeded with a loan of $2,000.

Not all Republicans agree that the president should adopt more centrist Social Security policies; some say that he should move in the other direction, calling for a plan that privatizes Social Security faster, which they say would be an easier sell than the plan Bush has adopted so far. Rick Tyler, an aide to former Republican House Speaker Newt Gingrich, a fierce advocate of private accounts, says the White House should call for even bigger private accounts than the ones Bush has proposed. In his State of the Union speech, Bush said he wants to allow workers to divert a third of their Social Security money into the stock market. Tyler says that half of payroll taxes should be eligible for private accounts, as larger accounts would grow faster in the market, and that the extra money would reduce the need for benefit cuts. As Tyler sees it, Bush should pledge that his plan will not cut traditional Social Security benefits. "I've had access to enough members [of Congress] to know that they're not going to want to run for reelection after having voted for a benefit cut," Tyler says.

To say the least, economists are skeptical that the long-term solvency of the Social Security system can be guaranteed by allowing workers to invest a great deal of their money in private accounts. Such large accounts would create much larger transitional costs than the ones Bush has outlined, and it's hard to see how Bush would sell lawmakers on this kind of plan. But Tyler says it can be done. Bigger private investments, he says, will ultimately lead to enormous long-term gains. And the president will make or break his plan on the strength of selling those gains to Americans. "With the president's help, I think we can get it done," Tyler says. "This is really a communications challenge -- it's not an economic challenge, it's a political challenge."

But what does the White House want from this political fight? It's not clear. Is Bush an ideologue who will support only the plan advocated by the extreme right, the groups who don't want to compromise? Or is he a tactician who wants to chalk up a win, any win, on Social Security, even if he has to abandon his principles and compromise with some centrist Democrats to do it?

Evidence so far suggests that he won't compromise. But Ornstein says he could change his mind, because the payoffs to compromise might be sweeping. By abandoning his plan to carve out private accounts from Social Security taxes, Bush could plausibly pull together a coalition of Republicans and Democrats to institute a series of realistic, moderate reforms to return Social Security to solvency. If he did so, he could claim to have "saved Social Security" -- certainly the kind of thing that gets you into the history books.

Compared to the opposition he faces for his current plan, opposition to such a centrist plan may indeed be slight. John Rother, director of policy and strategy for the political powerhouse AARP, says that if Bush pressed ahead with real reforms to the system, AARP -- which supported his Medicare bill but which is spending considerable resources fighting private accounts -- wouldn't oppose him.

Of course, a number of Democrats could try to block any version of the plan, arguing that any Social Security legislation passed by Bush, even a relatively good bill, would hurt Democrats. But if Bush endorsed centrist ideas on Social Security, the Democratic unity would shatter, Ornstein says. And Ornstein believes the White House is nimble enough to refocus its efforts to cash in on a fruitful plan -- after all, that's what the Bush White House does when it meets resistance. Bush was against the 9/11 Commission before he was for it. The president criticized the McCain-Feingold bill before he signed it. And remember Bush's sudden decision, in the spring before the 2002 midterm election, to co-opt Democrats' plan to create the Department of Homeland Security? And we remember how well that election went for the Democrats.

But can Republicans really embrace a plan different from the one the president crowed about at his State of the Union and not look foolish or desperate? Ornstein says the Republicans are adept at doing that too. "When the White House puts a message out about where they're going, they don't need a phone tree to have all of their acolytes -- from the Wall Street Journal to Drudge to Fox News -- repeat it ad infinitum and have the base fall in line," he says. If Bush suddenly began to compromise, Democrats would claim a small immediate victory for having changed the president's thinking. But in the end, he'd take the credit for taking on the third rail of politics.

It's an interesting situation. When it comes to Social Security, Democrats had better hope Bush remains as inflexible and incompetent as he's been so far. Otherwise they'll be in trouble.

Farhad Manjoo

Farhad Manjoo is a Salon staff writer and the author of True Enough: Learning to Live in a Post-Fact Society.

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