With Howard Dean having taken the helm as chairman of the Democratic National Committee and President Bush good to go with a proactive and provocative agenda for his second term, the fires of partisanship are again being stoked. The issues, for now, seem to be shifting from Iraq and terrorism to challenging the self-declared “compassionate” nature of Bush-style conservatism, a philosophy of governing that seeks to cut some domestic spending in order to reduce overall federal spending growth while still protecting those citizens who need protecting.
The first duck in the Democrats’ sights is the Bush initiative to fix Social Security, a system they tell us isn’t even broken. Indeed, Bush could have passed this one up, since the problems foreseen for it are all in the out-years, long after Bush will have left office. But he seems bent on doing more than just holding down the fort for the next four years and so, contrary to historical precedent, is churning the waters with real calls for change in his second term.
Perhaps that, more than anything else, is what stirs the partisan pot with Democrats. If they’re to be believed, the president is out to steal our national birthright, under the guise of being compassionate, and the Social Security system, a treasured legacy from the FDR years, is to be his first target. It’s all about cynically demolishing our venerable retirement system, they suggest, and putting us in the hands of unscrupulous markets and investment bankers.
This, more than anything else, perfectly crystallizes the differences between modern liberals (or “progressives” as many now like to be known) and conservatives. The liberal view is that we’re all entitled. And one of the things we’re entitled to is benefits, whether the present system can sustain them or not. When the time comes and the system flounders, as experts now foresee, we can just raise taxes and that’s solution enough, say the Democrats. Besides, they add, we have some forty years before the issue really hits the fan, so why worry about it today?
The truth is, everyone pretty much agrees that the system is unsustainable as it’s currently constituted. By about 2018 the surplus of current payments now being generated by contributions from people in the workforce will cease because the number of workers contributing will no longer be able to fully cover the costs of pay-outs to retirees. At that point, the system will have to begin tapping into its accumulated surplus from past pay-ins. But those accumulated dollars don’t exist except in the form of IOUs, because the Social Security Administration has long since loaned all that money to the federal government by buying U.S. Treasury bonds. The practice of investing Social Security payroll tax proceeds in U.S. Treasuries to generate cash for other governmental operations goes back to Lyndon Johnson’s Great Society. Well, it seemed like a good idea at the time!
But in 2018 this accumulated surplus has to start being redeemed to keep Social Security going. The amount to be redeemed to cover benefits ratchets up radically in the years after 2018. By 2042 (or 2052, depending on whom you listen to), even these IOUs the system is now holding will have been fully exhausted, at which point the system will only be able to sustain payments at 75 percent of anticipated benefits. In the years leading up to 2042, meanwhile, the government will have had to do one of three things: borrow more money at unpredictable rates to redeem the outstanding Treasury bonds now held by the Social Security system (thereby driving federal debt and interest rates higher); cut benefits well before we reach 2042; or raise taxes to get enough money to redeem the Treasury bonds and keep benefits at the promised levels. This, apparently, is the critics’ idea of an untroubled system.
In fact, all of the prospective options for dealing with the developing crunch to keep the system afloat are highly problematic. Borrowing more money in the amounts required will drive up money costs while adding to the deficit, thus imposing a serious drag on the economy, killing jobs and adversely affecting overall American prosperity. This could well manifest as a substantial economic downturn that would make the stagflation of the 1970’s, or even the Great Depression, seem tame by comparison.
On the other hand, cutting benefits won’t make retirees and prospective retirees very happy since they’ll have paid their Social Security tax on their earnings in good faith all these years, expecting to get the benefits they were promised. Telling them the money isn’t there any longer poses hair-raising possibilities.
To the bulk of the Bush critics, raising taxes looks like the easy way to go, especially if it can be presented as sticking it to “the rich.” Unfortunately it was just such high taxation that got us into the stagflation of the seventies in the first place. Cutting taxes in the eighties, on the other hand, actually pulled us out. High tax rates are a drag on the economy no less than high debt, and hard experience has demonstrated this time and again.
So what to do? Admittedly, Bush let spending get out of hand in his first term, apparently hoping to convince voters that conservatives cared, too, and were just as “compassionate” as progressives. Although his first-term tax cuts helped revive and sustain a dangerously listing economy, damaged so badly by the dot.com bubble collapse and the attacks of 9/11, he did not hold spending in line with those cuts. Now he’s made it clear he means to correct that. And that’s what the self-styled progressives are up in arms about. They don’t want cuts in any benefits, only increases, with taxes raised to sustain these.
The Bush proposal to restructure the Social Security system includes a suggestion to voluntarily privatize part of it, though no workers (as it’s currently being discussed) would initially be forced to give up continued participation in the fixed system if that’s their preference. The hope is that they’ll choose to avail themselves of the personal account investment option since it will offer a better deal, i.e., a system more in line with individual retirement accounts (IRAs) and various private pension packages that allow workers to save their own money in designated investments pre-selected to minimize risk. The improved return they could garner from this would plug the gap that will inevitably occur when the system reaches the point in 2042 that benefits will need to be cut or new revenues found.
The upside here is that returns for personal retirement accounts have invariably exceeded the returns on monies paid into the Social Security system over comparable periods. Workers would also have a degree of control over that portion of their payroll taxes they place into such investments, and would be able to pass these on to their children. The current system does not allow either personal control or inheritance.
The downside? Market risk, of course. But given the carefully screened investment options likely to be offered, nothing short of a major collapse of the system, as we saw in the 1930’s, would likely devastate the proposed private retirement nest eggs.
But if we did get such a massive downturn, the Social Security system would be in big trouble anyway, with the government finding itself hard-pressed to make its own ends meet, let alone support the current unsustainable system. So if we leave things as they are (as the Democrats demand) and just go with the flow, the impending fiscal imbalances in the Social Security system arising after 2018 could very well tip us into a 1930’s-style crisis, no matter what. At the least, solving the problem by raising taxes could return us to the struggling seventies.
So when all is said and done, how compassionate is the Bush agenda? If compassion is measured by a willingness to deal with problems that lurk down the road and threaten to overwhelm our children long after we’ve passed the torch to them, then the president’s proactive approach is precisely one that caring parents can appreciate. Indeed, what could be more compassionate than leaving our children a system that works, instead of one that doesn’t?
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