Social Security reform could be for Republicans the kind of donnybrook that health care reform was for Democrats in 1994. The magnitude of the political risk is staggering. On Capitol Hill, many Republicans wonder if they are being led off a cliff. What does President Bush think he's doing?
Well, he says, there's a Social Security crisis. "The crisis is now," Bush said in December. But he must know this isn't true. Economically speaking, stabilizing Social Security's long-term finances is a task of only middling difficulty and importance; it requires no fundamental change in the program and need not be tackled right away. As for private Social Security accounts, they are — again, economically speaking — a solution in search of a problem.
No, what Bush and the Republicans are focused on is not the economy, stupid. It is conservative social engineering on the grandest possible scale.
When people talk about Social Security reform, they usually mean "reforms," plural. They're usually linking two kinds of change that are conceptually and mechanically distinct. Reform No. 1 would reduce the growth of benefits, or raise taxes, to bring the program into long-term fiscal balance. Reform No. 2 would structurally revamp the program by creating private accounts: Part of your Social Security payroll tax would go into a bank account with your name on it, to be used to finance your future benefits, instead of going to the U.S. Treasury to finance the benefits of current retirees, as it does now
Congress can make one reform, both reforms, or neither. Doing either, by itself, is politically difficult, but doing both together — simultaneously cutting and restructuring the program — is startlingly audacious. That is what Bush seems likely to propose. Why take the chance? On close examination, the economic payoffs are surprisingly unimpressive. The moral and political dividends are, potentially, another matter.
The fiscal payoff. Social Security is often said to be insolvent, because in about 2018 its benefit payments will exceed the revenues it collects through its dedicated payroll tax. Then the general budget will begin to subsidize payouts. But this is no kind of crisis. Social Security's surpluses have subsidized general budget spending for decades; if the government needs to use general revenues to subsidize Social Security, that will be no tragedy.
The real fiscal crisis is not that Social Security will be technically insolvent in a few years, it's that the whole U.S. government is genuinely insolvent right now. Washington's large deficits suck in and burn off capital that could otherwise be invested for future economic growth.
Indeed, Social Security's difficulties pale next to those of Medicare, which is headed for a real crisis. Current projections show spending for Medicare overtaking spending for Social Security in the early 2020s, and then soaring right off the chart, whereas Social Security outlays level off (as a share of gross domestic product) in the mid-2030s.
Still, if Bush grasps the nettle of slowing Social Security's future growth, that would be both brave and helpful (at least in the longer run, since the president promises to protect current retirees). On the other hand, Bush's profligacy is largely to blame for the government's current fiscal disrepair, so Bush would be saving us from himself.
In any case, Social Security can be brought into long-term balance without changing its structure, simply by making it less generous. So why private accounts?
The retirement payoff. Advocates of private accounts note that stocks and other financial instruments pay higher returns than the current Social Security program does. Along with better returns, however, comes greater volatility. "You can get higher returns from the stock market if you're willing to tolerate higher risk," says Barry Bosworth, a Brookings Institution economist. "The one thing you can't have is a free lunch." Some people (me, for instance) would rather take their chances in the stock market than leave their pension to the tender mercies of Congress, but different people will make the call differently. Once risk is accounted for, there is no windfall either way.
Anyway, moving Social Security assets into stocks can make some people better off, but it can't make everyone better off, because someone would end up holding the government bonds that Social Security holds today. As federal pension money moved into stocks, returns on stocks and bonds would shift in complex ways, but this asset reshuffle would not enlarge the economy — just rearrange its composition.
The economic payoff. Could Social Security reforms improve economic growth? In principle, yes — by increasing saving and investment, something the country badly needs to do. Slowing the growth of future benefits would boost government saving in a few decades, if the government didn't just spend the proceeds on some other form of consumption (a big "if"). Private accounts could also increase national saving — if they were financed by cutting government spending or raising taxes, and if people didn't offset their new private accounts by saving less in their 401(k) plans. Two more big ifs.
Individuals would probably offset their private Social Security accounts to some extent, but no one knows how much. What is clear is that Congress would rather gargle battery acid than finance private accounts by cutting spending or raising taxes. More likely, it would finance them by increasing the deficit. And so the Treasury would borrow right back again the money that people deposit into their Social Security accounts.
The net effect would be a wash — unless, that is, the higher deficits created by privatizing Social Security would induce the government to tighten its belt. Many liberals fear that private Social Security accounts are another Republican scheme to "starve the beast" in Washington. Well, maybe. But the record of Bush and the Republicans suggests that they spend just as merrily whether the deficit is high or low.
The moral and political payoff. Earlier this month, a White House aide named Peter Wehner (director of strategic initiatives) sent selected conservatives a memo making the case for Social Security reform. "We consider our Social Security reform not simply an economic challenge, but a moral goal and a moral good," he wrote. "If we succeed in reforming Social Security, it will rank as one of the most significant conservative governing achievements ever."
The emphasis was revealing. The memo had little to say about long-term growth and other economic effects of reform. It stressed moving "away from dependency on government and toward giving greater power and responsibility to individuals." At the libertarian Cato Institute, Michael Tanner, the director of the project on Social Security choice, makes the same case. "We're changing fundamentally the relationship of people to their government," he says. It would be "the biggest shift since the New Deal."
Bingo. Once you cancel the zeros on both sides of the equation, neither creating private Social Security accounts nor ratcheting down the growth of future benefits would be an economic milestone. Conservatives need to frame Social Security reform as a dollars-and-cents issue, but that is not really why they are excited. What they really hope to change is not the American economy but the American psyche.
Conservatives used to speak derisively of liberal social engineering. The attempt to create private Social Security accounts is, so to speak, conservative social counter-engineering. Government should help provide for unforeseeable contingencies: tsunamis, unemployment, open-heart surgery. But if there is one event in all of human life that is wholly foreseeable, it is the advent of old age. Why, then, shouldn't people save for their own retirement, instead of relying on welfare from the government — which is what Social Security, as currently constituted, really is?
Tanner argues that people who own assets behave differently and see their place in society in a different light. Private accounts, he says, would encourage a culture of saving and personal responsibility; they would discourage political class warfare; they may, he argues, improve work habits, and even reduce crime and other social pathologies. Create private Social Security accounts, and millions of low-income Americans will be stockholders and bondholders. Republican political activists look at the way portfolio investors vote — and salivate at the prospect of millions more of them.
The 2004 exit polls suggested, to many conservatives, that "moral values" won the election for Bush. It may seem odd, then, that his boldest post-election priority is not abortion or gay marriage or schools, but Social Security. The key to the paradox is that Social Security reform is not, at bottom, an economic issue with moral overtones. It is a moral issue with economic overtones.