by John M. Curtis
(310) 204-8700

Copyright December 19, 2004
All Rights Reserved.

roposing a sweeping Social Security overhaul, the Bush administration knows it must strike quickly before the president becomes an official lame duck. With the first waves of baby boomers set to retire in 2010, the White House insists Social Security faces insolvency without major reforms. “Message No. 1 to Americans: When it comes to Social Security, the sky is not falling,” said Richard Durbin (D-Ill.), the Senate's new assistant Democratic leader, disputing the idea that the trust fund is in dire straits. Growing concerns about the expected drain from retirees fuel GOP arguments that privatization is the only way out. Yet Democrats argue that diverting Social Security payroll taxes to private accounts makes matters worse by creating a funding shortfall, something around $2 trillion. Financing the shortfall would explode an already astronomical federal budget deficit.

      White House economists believe privatizing Social Security solves its long-term fiscal crisis by dramatically reducing future government payouts. But does privatization add more insecurity to retirees by tying benefits to risky investments? If nothing else, the 2001 stock market meltdown taught investors a bitter lesson. Retirement savings can easily go up in smoke when the market heads south. President George W. Bush has frequently criticized the Social Security's historically low investment yields, somewhere around 2%. Yet 2% looks awfully good to investors whose retirement accounts were wiped out in Wall Street's recent setbacks. Bush recently ruled out increases in Social Security payroll taxes to fund the added drain when boomers draw benefits. Upping the age at which retirees draw benefits postpones the day of reckoning but doesn't fix the problem.

      Refusing to increase payroll taxes and insisting on private accounts, the White House drew its line in the sand. Democrats find themselves in a no-win situation. If they oppose reform, they're seen as obstructionists. If they support it, especially privatization, they're regarded as appeasers. “Bush keeps doing things that are not particularly helpful for getting bi-partisan support,” said Maya MacGuiness, president of the Committed for a Responsible Federal Budget, a watchdog group that supports overhauling Social Security. “I don't think it is sufficient for Democrats to just say no,” said Sen. Thomas Carper (D-Del.), concerned that Bush's reelection has at least some mandate for reforming Social Security. Democrats can't, on the one hand, promise to protect Social Security but fail, on the other hand, to offer constructive solutions for dealing with its insolvency crisis.

      In 1980, the late President Ronald Reagan, while running for president, talked about Social Security's impending fiscal crisis, criticizing President Jimmy Carter for passing a whopping payroll tax increase. “Having tried to demonize privatization in three successive elections and not having tremendous results, they have to try something better,” said Will Marshall, president of the Progressive Policy Institute, a centrist Democratic think tank. What scares opponents about privatization are two things: (a) creating an immediate funding shortfall and (b) placing investments at risk in the stock market. It's possible for the Federal Reserve to issue new long-term paper, treasury bonds, to fund the shortfall. It's also possible for the Congress to create new federal insurance to protect Social Security stock market investments. Without federal insurance, investments accounts are too risky.

      Proposing federal insurance quiets opponents concerns about the risky business of private investment accounts. No Social Security investment account should operate, like federally insured deposits, without federal insurance. Private insurance is already available for certain types mutual funds. There's no reason why the federal government couldn't insure private Social Security accounts. Different classes of investments or asset allocations carry manageable risks. “The White House is trying to maneuver Democrats into the position of doing the root canal work,” said Marshall Whitman, an analyst at the Democratic Leadership Council, resisting the idea of a Democratic-sponsored reform proposal. Most Democrats believe it's up to Republicans to offer a Social Security reform plan. But by spotting the GOP the initiative, Democrats will remain at the mercy of GOP proposals.

      Taking the initiative, the White House remains in the driver's seat on Social Security reform. Democrats can play spoiler but they risk driving the Party into further disarray before the '06 midyear elections. “They did not want to be put in the position of blasting the administration right out of the box,” said a senior Democratic leadership aid, hoping to resist what promises to inordinate GOP pressure. Full-court pressure is now on to get Social Security reform. Democrats can't stonewall without political fallout. On the issue of private accounts, it's time to deal with the primary concern of shielding private accounts from stock market risk. Federal insurance would satisfy lingering doubts about market investing. Like certain insured mutual funds, there's no reason why the same kind of insurance can't apply to private Social Security accounts. Democrats must do more than throw up their hands.

About the Author

John M. Curtis writes politically neutral commentary analyzing spin in national and global news. He's editor of OnlineColumnist.com and author of Dodging The Bullet and Operation Charisma.

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