Politics & Policy

A Worthy Compromise

A plan for Social Security reform that stops the bleeding and starts the healing.

President George W. Bush redoubled his commitment to Social Security reform last week by delaying his tax-reform panel’s report until the fall. The message to Congress is clear — they can’t simply ignore the Social Security issue and run out the clock. However, even with a strong commitment from the White House, reform is still a tough sell. Seniors’ groups like the AARP are diametrically opposed to what Bush is proposing and are rallying their members around the slogan, “Don’t let the solution become worse than the problem.”

AARP, and groups like it, are taking the “head in the sand” approach. By ruling out the idea of personal retirement accounts, they are focusing on what is good for the government rather than what is in the best interests of workers.

The dirty little secret of the whole Social Security business is that Congress continually spends tomorrow’s benefit money today, leaving paper IOUs in place of that money. This works until 2016, the last year in which the Social Security fund will have a surplus. After that, the system will pay out more in benefits than it takes in, unless taxes or the retirement age go up or benefits come down — the traditional Washington-based fix for Social Security anytime it threatens to go bankrupt. On paper, the government’s books may balance, but “balance” only occurs when workers pay more and get less in return.

Congress will spend the Social Security surplus as long as it can, something proponents of real reform understand. Said the president in a June 8 speech, “You pay your payroll tax, we pay out to current retirees, and then we spend your money on other government programs. I happen to believe there’s a better way.”

Bush is right. There is a better way — one that does not involve higher taxes or future benefit cuts and is a better deal for the American worker. Instead of spending the Social Security surplus on government programs and pork, Congress could take a major step toward permanent reform by passing a compromise plan that would start personal retirement accounts now, paid for out of the Social Security surplus.

To achieve this compromise the Democrats would have to drop their complete opposition to even the idea of personal accounts while the Republicans would have to give a little on their desire to produce a plan that permanently settles the question of solvency. But it is a workable option — one that buys needed time to develop a long-term solution without wrecking the U.S. economy today, and while giving workers a real chance for a better return tomorrow.

A compromise such as this, which moves toward a modernized system at an incremental pace, would give financial markets the time to adjust and also allow for mid-course adjustments as needed. It is consistent with Bush’s fundamental principles for reform and is exactly the approach called for by Alan Greenspan. The Federal Reserve chairman has told Congress that personal accounts should be opened “in a cautious, gradual way,” and he has advised legislators to “go slowly and test the waters.”

The projected surpluses, along with the interest scheduled to be paid into the Social Security trust fund, would be enough to underwrite the first 10 years of a phased-in version of the plan drafted by U.S. Rep. Paul Ryan (R., Wis.) and U.S. Sen. John Sununu (R., N.H.). Their plan, by the way, would provide higher future benefits for workers than the present system can promise.

The gradual phase-in of personal accounts funded by the surplus would force Congress to cut spending by the amount it currently takes from the surplus — about $85 billion a year, or roughly 3 percent of the total $2.5 trillion federal budget.

This is easily done if Congress gets serious about spending restraint. Citizens Against Government Waste, the taxpayer watchdog group, recently issued a report identifying $27 billion in pure political pork added to this year’s budget that could easily be tossed over the side in future years.

The interest already scheduled to be paid through the issuance of new bonds, which in the compromise plan would be directed to personal accounts rather than the trust fund, would not be new debt and so would not increase the cost of the compromise approach. Workers could then sell those bonds, if they chose, and put the money in broader mutual funds and realize an even greater return on investment.

The goal of reform is not to make the government’s books balance — it’s to create a better deal for the American worker, something the compromise approach would accomplish with minimal disruption in the financial markets while providing a down-payment on permanent solvency. This compromise plan may not get us all the way there, but it stops the bleeding and starts the healing.

Dr. Lawrence Hunter is vice president and chief economist and Phil Kerpen is policy director for the Free Enterprise Fund.

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