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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 Now

Good 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 Dow 36,000 just yet. It turns out the commission doesn't want to us to carpe diem until next annum. In a feat that would make the great Oakland Raiders punter Ray Guy proud, the commission recommended that the nation wait at least a year before acting on any of these proposals. Talk about hang time.

Social Security will run an annual deficit starting in 2016, but it wouldn't be prudent to start implementing a solution for another 13 months.

The punt provides better field position to politicians -- particularly to Republican politicians. Having lost control of the Senate last spring, the GOP fears that its six-vote majority in the House will evaporate in the fall. (The party of a sitting President almost always loses congressional seats in the midterm election.) Given the sagging markets, Democrats are eager to tar Republicans with a risky scheme to tie our grandparents' sustenance to Enron (ENE) and its ilk.

Of course, in the 2000 campaign, President Bush touched the third rail of American politics and lived to tell about it. He explicitly called for establishing private accounts and investing Social Security funds in stocks. Doing so didn't hurt Bush much, probably because he never demonstrated that he truly understood what the program was all about. At one point, he ridiculed the Democrats for acting as if Social Security was "some kind of a government program" -- which it has been since its creation in 1936.

Political Problems

Sadly, 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.

Of course, for those who expect to need Social Security after 2017, which is to say most of us, benefit cuts already are in the cards. The system as currently structured simply won't be able to support us 30-somethings when we're 64.

For their part, Republicans have willfully propagated and sustained popular misconceptions about the program. Their argument for "privatization" goes something like this: Funds collected from Social Security payroll taxes are now invested in government bonds. If that money went into stocks instead, they argue, a worker who otherwise lacks access to a brokerage account could notch up higher returns and accumulate a substantial nest egg.

Sounds nice. Unfortunately, Social Security is not a massive, national 401(k) program in which people sock away money for later use. Rather, it's an intergenerational transfer of wealth in which today's young workers pay taxes to subsidize the retirements of today's old people. Changing the system to one that more closely resembles personal retirement accounts is an extraordinarily expensive proposition.

No Trillions to Spare

Why? 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.

Daniel Gross is a fellow at the nonpartisan New America Foundation and the co-author of Generations of Corning. He welcomes your feedback was gross@newamerica.net.

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