Punting on Social Security Reform
The nation's longest punt this week wasn't covered on ESPN's SportsCenter.
On Tuesday, the President's Commission to Strengthen Social Security, chaired by newly named AOL Time Warner (AOL) CEO Richard Parsons, a Republican, and former Sen. Daniel Patrick Moynihan, a Democrat, released its report.
Sounding an alarm bell about the nation's safety net -- "the system is not sustainable as currently structured" -- the report offered three potential options to set Social Security back on the road to insolvency. Each involved diverting a portion of Social Security payroll taxes out of government bonds (in which they're now invested) and into private accounts, which could hold stocks and bonds.
It concluded: "Carpe diem!"
Not Much Optimism NowGood news for investors, right? After all, market pundits have long projected that privatized Social Security funds would someday flow into the markets like a mighty stream, thus causing stocks to levitate permanently at high levels. Well, don't dust off your copy of
Political ProblemsSadly, given the quality and caliber of rhetoric surrounding Social Security -- from Bush and both houses of Congress -- it may take far longer than a year to lay the groundwork for significant change. For generations, Democrats have charged that any proposed change to Franklin D. Roosevelt's great social welfare plan would ruin it. Predictably, they hastened to denounce the commission's proposals before the ink had even dried. Rep. Robert Matsui, the senior Democrat on the House Ways and Means Committee's Social Security subcommittee, declared the commission's proposals "dead on arrival." Other Democrats piped up that such a plan would lead to benefit reductions.
No Trillions to SpareWhy? Benefits must be maintained for existing retirees and those near retirement, even as some of the funds previously dedicated for that purpose are diverted into private accounts. The estimated cost is $2 trillion to $3 trillion over 75 years, with many of those costs coming upfront. That's money we simply no longer have. Maya MacGuineas, my colleague at the New America Foundation, has proposed a fairer and less costly solution. Under "progressive privatization," there would be a shift to private accounts, and benefits would ultimately decline. The government would essentially match contributions made by lower-income workers, but not for higher-income workers. The sound reasoning is that Wall Street managing directors don't need the same sort of assistance as Wall Street couriers do. Instead of borrowing the funds to pay for the transition costs, the government would bite the bullet and pay them. But even such a sound proposal probably won't get a hearing in 2003. Midterm elections will heighten the partisanship in Washington -- especially if Democrats tally some gains in the House. As 2003 drags along, attention once again will focus on the 2004 presidential election. Social Security may yet be saved, and payroll taxes may roll into index funds, providing a permanent influx of fresh capital to support sky-high valuations. But given the commission's booming punt and the climate in Washington, this scenario now seems about as remote a possibility as Yasser Arafat receiving an invitation to next year's White House Hanukkah party.
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