Can Bush Save His Social Security Legacy?

The lead editorial at today's Wall Street Journal, discussing upcoming congressional reform efforts on Social Security, warns President Bush against negotiating away his substantial legacy on entitlement reform. The cornerstone of the Bush Social Security plan is the creation of individual retirement accounts, which would move the New Deal-era program toward eventual privatization. The Democrats may not move forward, however, unless the administration casts off the president's goal for more individual control over retirement benefits:

The evident White House hope is that, in return for this retreat on personal accounts, Democrats would agree to reduce the growth of future Social Security benefits. Specifically, that means some form of "progressive indexing" that Mr. Bush endorsed in a failed attempt to coax Democrats from their just-say-no Social Security strategy in 2005.

Promoted by financier Robert Pozen, "progressive indexing" would adjust future Social Security benefits according to a cost-of-living index. Currently, benefits rise each year based on the increase in average wages, which over time has meant about 1% a year faster than general price inflation. This wasn't part of Social Security's original plan but became law in 1977 as politicians sought to buy off the senior lobby by increasing benefits. This means retiree benefits will double in inflation-adjusted dollars by 2077--so changing to an inflation standard certainly makes fiscal sense.

The Pozen plan is also "means-tested," meaning that the wages standard would change to the inflation standard on a gradual basis as retiree incomes rise. Lower-income workers would see no change in their benefit formula. Estimates are that the Pozen plan would nonetheless save enough money to eliminate about 70% of Social Security's current unfunded future liabilities. The White House hope is that if Democrats agreed to "progressive indexing," they and the President could then declare a bipartisan political triumph of having "saved" Social Security.

We endorsed the Pozen proposal last year, but that was when it was floated as a tradeoff for personal Social Security accounts. If those accounts are now off the table, then this kind of "grand bargain" is no bargain at all.

It is true that the Pozen plan would reduce future taxpayer liabilities on paper, but the key words are "on paper." No one can guarantee that future Congresses won't turn around and promise greater benefits once again as Congress did in 1977 and many other times over the years, even if the 110th Congress agrees to the Pozen formula. Al Gore used the temporary budget surplus as an excuse to promise more benefits as recently as the 2000 Presidential campaign.

More broadly, genuine Social Security reform is about more than federal accounting and "solvency." It ought to be about individual ownership and retirement independence. Personal accounts are a way to let younger workers--especially lower-income workers--put some of their payroll taxes into accounts that they would own and could grow over time. They would build wealth, and their future benefits wouldn't depend on the whims of future politicians. The Pozen plan by itself merely reduces their benefits and maintains Social Security as a cross-generational income transfer program.

As for "bipartisan" politics, Democrats cynically refused even to discuss Social Security reform last year, though they well know that benefits will soon start exceeding payroll tax revenues. Now that Democrats run Congress, they can reduce future benefits if they want to. But if they now want Republicans to give them political cover for doing so, at least the start of personal accounts should be part of the price.

The Pozen proposal is a great idea, because there's going to have to be some combination of benefit cuts or revenue increases for Social Security to remain solvent. Nevertheless, as I've mentioned in a previous post, the ultimate beauty of Bush's entitlement reform agenda has been the vision of social welfare through an "ownership society." This administration may not achieve that goal, though, and if personal accounts are completely discarded by the new Democratic majority, the ultimate shift toward privatization may become nothing but a conservative's dream.