He has taken on Iraq. Now Bush faces up to Social Security

BUSINESS ANALYSIS President accused of using WMD-style scare tactics in warning of non-existent crisis
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The Independent Online
IT IS CALLED the "third rail" of US politics: lay even a finger on Social Security and you will suffer the political equivalent of instant electrocution. Tonight, however, in his State of the Union address, President George Bush will not merely touch that third rail, but positively embrace it. He is expected to propose the greatest changes to America's hugely popular retirement safety net in the 70 years of its existence.

Social Security has come a long way since President Franklin Roosevelt signed the system into law in August 1935, to provide "some measure of protection to the average citizen" in the depths of the Great Depression.

Despite world war, the baby boom, the inflationary 1970s oil shock and much else beside, the system has survived, essentially unchanged. Today 47 million Americans, one in six of the population, receive a monthly cheque from Social Security. For the retiree of 65, the average payment is $1,184, but for the poorest 7 million of them, Social Security is all there is.

Now Mr Bush wants to change it. The system, he claims, is on an unstoppable trajectory towards bankruptcy, as a result of the ageing of the population being experienced by the US, along with the rest of the industrial world.

Once, a dozen active workers supported each retiree. Come 2040, there will be only two, the President argues; when those entering the workforce today retire in 35 or 40 years' time, the money will have run out. To avoid such a catastrophe, the President is calling for Social Security to be part-privatised. New workers will be allowed to invest part (according to reports, up to one-third) of their contributions in private savings accounts.

On the campaign trail last year, Mr Bush constantly extolled the virtues of these new accounts, as "something the government can't take away ... accounts you can pass on from one generation to the next". The idea sounded especially beguiling when he pointed out that long-term returns on stock market investments invariably outperform those dreary old Treasury bonds in which Social Security currently invests its surplus income.

But if America's ascendent economic conservatives have their way, this would be the first tremor in a political earthquake - not a tinkering with the status quo, but a step towards a total overhaul of retirement security that would replace a state safety net with private resources. Small wonder Social Security reform is a central facet of the "ownership society" that Mr Bush has made the domestic goal of his second term.

But is the remedy really that simple - and above all is there really a crisis at all? Social Security is financed by a payroll tax (currently 12.4 per cent) jointly paid by companies and their employees. Barring a few years in the late 1970s and early 1980s when inflation ran riot, the system has operated at a surplus. The difference between what it receives in contributions and pays out in benefits goes into a trust fund standing today at $1.5 trillion. By the best actuarial estimates, the surplus will continue until 2018. At that point the system will pay out more than it takes in. By 2040, if current contributions and benefits remain the same, the trust fund will have been exhausted, and the system will no longer be able to meet its obligations. In Bush-parlance, it will be "bankrupt".

But will it? Even after 2040, if nothing is done in the meantime, Social Security income will cover 80 per cent of scheduled payments. The very date too is hardly set in stone. Such calculations are no more than best guesses, at the mercy of unknowable variables, including life expectancy, childbirth rates and immigration patterns. The truth is, no one knows, any more than anyone knows what the budget deficit will be two years hence, let alone three decades down the line.

For many experts therefore, part-privatising Social Security is like using a sledgehammer to crack a walnut. Yes, there is a problem, but one that can be easily dealt with by slight adjustments to the status quo: a small increase in contributions, or an increase in the ceiling on incomes (now $90,000) on which Social Security tax is levied, or a rise in the retirement age (now 65 years and six months).

For Democrats, Mr Bush is repeating the scare tactics he used over Iraq and its non-existent weapons of mass destruction, warning of a crisis when there is none, to achieve his ends - in this case the advance of a right-wing ideological agenda. Others, even more darkly, attribute the entire scheme to none other than the President's political guru Karl Rove, as a ploy to convert today's new workers into tomorrow's Republican voters.

But many fiscally conservative Republicans too are wary of Mr Bush's plans, for opposite ideological reasons of their own. For a long period, as money that would otherwise go into Social Security goes into private accounts, the system would be unable to meet payments from its own resources. To cover the shortfall, even the White House admits, the federal government would have to borrow $2 trillion - at a time when the country is already running huge budget and external deficits. Contrary to what Mr Bush claims, the switchover to part-privatisation would thus increase the burden on future generations.

But for the President, the wiggle room is very small. Raising contributions would amount to a tax increase which is anathema to this administration. The only other available compromise is a cut in benefits; in one form or another, that will almost certainly be the outcome if Mr Bush has his way.

But will he? Not only are most Democrats implacably opposed to a measure that will require a measure of bipartisan support to pass. The AARP, the powerful retirees' lobby group, is against part-privatisation; so too, no less ominously, is Bill Thomas, the Republican chairman of the tax- writing House Ways and Means Committee. Others say the real problem is not Social Security but Medicare, the federal programme for the elderly and disabled that faces a medium-term deficit eclipsing that of Social Security. In other words, if it ain't broke, don't fix it.

In the end, the battle will be won by perceptions. Tonight, Mr Bush will make the case that Social Security must be fixed, and soon. If enough Americans are frightened into believing him, he will have his way. But he would do well to consider the Clinton experience. In 1993, the former president launched a plan to provide universal health care in the US. No idea could be more laudable - yet the Clinton plan foundered as opponents succcessfully framed it as a hideous new bureaucracy, an expansion of government that amounted to backdoor socialism.

Already there are signs Mr Bush is retreating. Last week, he spoke for the first time of Social Security as a "problem", not as a crisis. And history could be about to repeat itself. The last time Social Security got into trouble, in the early 1980s, Ronald Reagan set up a commission, headed by a certain prominent economist named Alan Greenspan.

The commission's recommendations, a mix of payroll tax increases and benefit reductions, did the trick then. Could a repeat role await a certain Federal Reserve chairman when he finally becomes a retiree early next year?