Okay, why does everybody say that President Bush has a plan to close Social Securityâs deficit? The Bush plan is to allow workers to divert some percentage of their payroll taxes into private accounts. This is essentially a tax cut: instead of sending your money to the government to be spent on current Social Security recipients, you get to keep it, albeit for an earmarked purpose. Tax cuts donât make deficits smaller, they make them larger.
To the extent that the press has recognized this, itâs to say that âprivate accounts by themselves do nothing to fill the deficit.â But this is a massive understatement. Private accounts by themselves make the deficit larger. Imagine Bushâs âplanâ to fix Social Security consisted of building immense gold statues of himself through the country. Would one say that this plan by itself does not solve the problem? Obviously, that would be far too kind.
Now, itâs a little more complicated than that, but not much. Here are the caveats. First, conservatives have a theory that private accounts will be a âsweetenerâ to make benefit cuts easier. If people have private accounts, theyâll more likely accept cuts in the guaranteed benefit. But this strikes me as highly implausible. Taking away a guaranteed benefit is politically hard. Polls show the public overwhelmingly opposes replacing part of a guaranteed benefit with a private account. Basically, privatization means packaging whatever cuts are going to have to happen in order to make the program solvent with even more cuts needed to radically transform the system. The more money thatâs diverted into private accounts, the more that has to be cut from the guaranteed benefit.
You could argue that the gold statue plan would make benefit cuts easier also. Maybe the gold statues would make Bush into a more prestigious, even God-like, figure in the public mind, and therefore more people would be willing to accept benefit cuts he proposed. But thatâs not a very convincing argument either.
The second caveat is that Bush now proposes to have those who open private accounts accept in return cuts in their guaranteed benefit when they retire years later. Fiscally, this is better than proposing private accounts without explaining how you would pay for them. Yet it would still lead to huge increases in the national debt. Conservatives dismiss that debt as a down payment on reform. The government is going to get its money back eventually, they argue, so why worry?
The answer is that the government may not get its money back. By letting workers keep their payroll taxes, the government will owe lots of actual currency. In return for this, those workers promise to take lower benefits one day. But those promises can be revoked by future Congresses. If the market tanks and some workers do worse than those who retired a few years before them, the pressure for bailouts will be intense. In all likelihood, the government will get back somewhere less than 100% of the payroll taxes it agreed to forego.
All in all, the most optimistic thing you can say about Bush is that his plan would do no harm. The more accurate thing to say is that his current plan would exacerbate the problem in the guise of solving it. Whatâs completely unsupportable is to say that Bush has a plan to save Social Security and the Democrats donât.
