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Privatized Accounts Moved to 'Fast Track'

BY Warren Vieth and Janet Hook
11/05/2004
by Warren Vieth and Janet Hook on 11/5/04.

WASHINGTON — President Bush on Thursday set the stage for a monumental legislative battle by placing Social Security reform at the top of his second-term agenda, even though he acknowledged that no long-term fix would be pain-free.

Although he did not embrace a specific blueprint, Bush said the starting point for discussions was a set of recommendations that in all likelihood would run up the federal debt and reduce government-paid benefits for workers who chose to set up private retirement accounts.

"There will be costs," the president told reporters during his first postelection news conference. "But the cost of doing nothing … is much greater than the cost of reforming the system today."

Members of Congress and independent policy analysts said the president's remarks signaled a willingness to spend his newly won political clout on an issue so sensitive that leaders had long been reluctant to grapple with it.

"He is getting ready for bold action on Social Security. He's getting people prepared," said Rep. Paul Ryan (R-Wis.), an advocate of private retirement accounts.

"It's going to be an enormously bloody fight," predicted Michael Tanner, director of the Project on Social Security Choice at the libertarian Cato Institute. "But the political climate really has changed, and it is possible to do this now…. It's on the fast track."

Because revising Social Security and Medicare generally requires unpopular changes in taxes or benefits, the entitlement programs for the elderly have long been described as the "third rail of politics" — fatal to politicians who touch them. But Tanner said Bush might have proved otherwise.

"The third rail has lost a lot of its juice," Tanner said. "If you look at the election results, this doesn't seem to have hurt the president. He even carried seniors."

In the Senate, at least, Republicans seemed to share that assessment.

Sen. Lindsey O. Graham (R-S.C.), a leading proponent of Social Security revision, said Bush had personally assured him he would make this a top priority of his second term. He said he considered it in keeping with Bush's penchant for big initiatives.

"He has a track record of taking a big idea and working hard to deliver it," Graham said.

Another reform proponent, Sen. John E. Sununu (R-N.H.), said he thought the outlook for action was much improved because of the big GOP gains in the Senate.

"I would hope a stronger majority will encourage us to be bolder and identify priorities that may be very challenging like Social Security," Sununu said. "Pushing that issue is not a matter of partisanship, it is being willing to use political capital to tackle an issue everyone agrees is important."

Among House Republicans, however, there were signs of skittishness.

They already are worrying about the 2006 elections because, historically, during a president's second term, his party loses seats in Congress at the midterm elections.

A senior House Republican leadership aide who requested anonymity predicted problems of two sorts: resistance from members who didn't want to tamper with Social Security at all, and qualms on the part of fiscal conservatives who worried about the transition costs.

Transition costs refer to money the government would lose — and would need to make up to pay current benefits — when workers retain some of the money they now pay in Social Security withholding taxes and instead put it into the private investment accounts Bush favors.

Independent analysts have estimated that diverting payroll taxes into private accounts, as envisioned by a reform commission he appointed in 2001, would reduce government revenue by as much as $1 trillion to $2 trillion over the next 10 years.

Although that loss would be offset by future reductions in government payouts, Washington probably would make up the difference in the meantime by borrowing even more at a time of already sizable budget shortfalls.

"It's problematic," the House aide said. "That doesn't mean we won't get it done."

Rep. E. Clay Shaw Jr. (R-Fla.), another reform advocate, said Bush's discussion of the issue Thursday "has given us the green light" to proceed. But he conceded that the political obstacles were substantial.

"This is not necessarily going to be a slam dunk, even with our [party] controlling Congress," Shaw said. "The far left and the far right are going to be dragging their heels."

Bush has advocated Social Security reform since his first presidential campaign in 2000, and has insisted that giving future retirees the option to create private accounts must be part of any overhaul.

On Thursday, he got more specific. He said he would discuss with Congress the findings of the commission he appointed to recommend ways to deal with the financial strains caused by the looming retirements of the baby-boom generation.

Co-chaired by the late Sen. Daniel Patrick Moynihan (D-N.Y.), the commission recommended three reform options, each of which would allow future retirees to divert a portion of their Social Security payroll taxes into private retirement accounts.

All three options called for a reduction in future government-paid benefits to offset the diverted payroll taxes. The theory is that private accounts will generate at least as much retirement income as the reduction in government payments.

Two of the three options proposed additional changes that would further reduce benefits from the levels required under current law. Those adjustments were designed to eliminate a projected funding shortfall in future decades.

None of the proposals would affect the benefits received by current Social Security recipients or those near retirement, and none called for an increase in the 12.4% payroll tax, which is split between workers and their employers.

"It's a good place for members of Congress to start," Bush said. "I will show them Sen. Moynihan's thinking as a way to begin the process."

Although Bush stopped short of endorsing the specific findings of the commission report, policy analysts and congressional insiders said his remarks indicated that he was willing to take more political heat on the issue than in the past.

"There's no way around it. All of the report's proposals have some cut in benefits, and two of them have very large cuts in benefits," said Dean Baker, co-director of the liberal Center for Economic and Policy Research. "Before, he was implying there was going to be some sort of free lunch."

Jack Kemp, a former Republican House member and former Cabinet member, said he thought the president's comments reflected his conclusion that Tuesday's election was a mandate for partial privatization of Social Security.

"He wants to leave a legacy of what he calls an ownership society, where people get a chance to own their own home, own their own retirement account, own a piece of the rock," Kemp said. "I think he is going to use that mandate."

Grover Norquist, president of Americans for Tax Reform and a leading proponent of private accounts, said Social Security reform dwarfed other Bush campaign proposals. "The president has now won two elections saying he wanted to do this," Norquist said. "The commission is the starting point for reform."

Former Sen. Bob Kerrey (D-Neb.), who participated in previous reform efforts, said he thought the Moynihan commission's findings were realistic, but doubted whether they would be accepted by many Democrats in Congress.

"It was seen as a group of people who were going to reach a conclusion that would basically support what the president had already decided he wanted to do," said Kerrey, now president of New School University in New York. "You can't get it done if you say, 'My way or the highway.' "