Flawed Social Security Plans

Credit George W. Bush with going where no presidential candidate in more than 35 years has dared to go, directly to the issue of doing some serious tinkering with the Social Security system. But having ventured boldly onto that politically dangerous ground, the Texas governor and expected Republican presidential nominee now has to show that he hasn’t lost his way. He will have to be a lot more specific about how he would change Social Security.

Bush says he wouldn’t change benefits due retirees or persons “nearing retirement,” that he wouldn’t increase the current 12.4% payroll taxes now paid half by workers and half by employers and, most controversially, that he would give younger workers the option to switch some of their payroll taxes to personal retirement accounts. These are respectable enough principles to campaign on. But sound public policy needs more than just a foundation of principles. Without nuts-and-bolts details it can’t be effective.

The aim of personal retirement accounts is to raise the rate of return on retirement funds, giving retirees more to live on. Bush won’t say what portion of payroll taxes he would divert to such accounts, though his aides mention 2% as a likely goal. Social Security has always operated on a pay-as-you-go basis: Benefits for retirees are paid out of current payroll taxes. Diverting 2% of payroll taxes would reduce Social Security revenues by about $1 trillion over 10 years. Bush hasn’t said how he would cover that shortfall, especially given his additional commitment to a $1.3-trillion tax cut.

The candidate is similarly vague about what investment options he has in mind for the personal accounts, saying only that they would be “reliable.” He also hasn’t said what the age cutoff would be for participating in the personal accounts.

Over time, stocks have offered the best returns among investments. But sustained market losses aren’t unknown. Does the Bush plan envisage some way of ensuring against significant market losses? Again, there is no answer.

Vice President Al Gore also has a plan for Social Security, and it agrees with Bush’s approach only to the extent that it too would seek to prolong the solvency of the system by relying on projected federal revenue surpluses that may never occur.

Gore would take the $2.2 trillion in Social Security surpluses anticipated over the next decade, add to them other surplus revenues and pay off the $3.5-trillion portion of the national debt that is publicly held. While that was happening, he would take the money saved on paying interest on the shrinking debt and put it, in the form of IOUs, into the Social Security trust fund. That, he says, would keep the system solvent until midcentury. It would also set the dangerous precedent of financing Social Security out of general revenues and stick future generations with the IOUs.

There is need for an informed Social Security debate, though whether this year’s presidential campaign is the proper venue for it remains to be shown. Providing for the long-term solvency of the system is more a political than a fiscal challenge because the easiest fixes--increasing payroll taxes, reducing benefits, raising the eligibility age--are all politically explosive. Bush and Gore have offered their alternatives. Neither plan impresses.