Deal or no deal? The new, yet eternal, politics of Social Security

National Review, Dec 31, 2006 by Ramesh Ponnuru

LOSING the midterm elections may have brought President Bush closer to achieving his goals for Social Security reform. Those goals are to make the program solvent and to expand the "ownership society."

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The elections made a bipartisan deal on Social Security more likely in four ways. First, they increased President Bush's incentive to cut one. If he wants a domestic-policy legacy, this is the most likely place for him to find one. Second, they increased his flexibility. During the last Congress, many Republicans insisted that any reform had to include personal savings accounts "carved out" of Social Security: Workers, that is, had to be able to take some of the payroll taxes they pay into the system and invest those funds themselves. That idea didn't get through Congress, largely because Democrats were solidly opposed to "diverting" Social Security money to personal accounts in this manner. Some Republicans still don't see any upside to a reform that lacks personal accounts. But it is obvious that personal accounts can't pass in a Democratic Congress, and the White House seems to have tacitly conceded as much--clearing the way for a deal.

Third, Democrats are no longer worried about losing everything. At the start of 2005, when President Bush began pushing for Social Security reform, they felt marginalized. Their only power in national politics came from their ability to mount filibusters in the Senate, and Republicans were threatening to weaken even that power. Under those circumstances, letting President Bush reform Social Security as the first act of his second term seemed likely to lead to their complete irrelevance. That fear is now gone. Blanket opposition to Bush's plan has already served its purpose: breaking his momentum.

Fourth, Democrats don't have to worry as much about allowing Bush to have achievements, because he is never again going to be the head of the Republican party during an election. By November 2008, the next Republican nominee will be the de facto head of the party. Democrats can work with Bush now while still blasting that nominee.

So the prospects for a deal are looking better. But there are still plenty of obstacles. For one thing, Democrats now think that they have a good shot at winning the whole enchilada--the House, the Senate, and the presidency--in 2008. They may therefore figure that it is better to stiff the president now and impose a Social Security reform entirely on Democratic terms in 2009.

If they're thinking ahead, however, Democrats might conclude that the purely partisan option isn't a smart one. The more they exclude Republicans and rely on Democratic votes to pass a plan, the heavier on tax hikes that plan will be. That would leave them with no Republican votes. Do the Democrats really want to be solely responsible for a big tax increase? Any plan to make the program solvent is going to include some unpopular elements. Neither party has an interest in going alone.

It is entirely possible that Democrats are not looking ahead. They may be assuming, vaguely, that they will deal with Social Security when and if they have to. They spent much of 2005 claiming that the program faced no major problems, and they may now believe it. Pete Stark, the leftwing congressman who will be chairman of a key House subcommittee on entitlements, said just before the election that warnings about Social Security's impending bankruptcy could be dismissed because the program's trustees had been proven too pessimistic. If productivity grows faster than they expect, he said, the program would face no funding problem.

Stark is wrong. Growth would bring more revenues into the system, sure, but it would also increase its expenses. That's because higher growth eventually translates into higher wages, and Social Security benefits are tied to wage levels. The trustees, meanwhile, have sometimes pushed back the date at which they expect Social Security to start bleeding money. But just as often they have pushed it forward. Overall, their predictions have been pretty stable. They have not been consistently over-pessimistic.

Other Democratic delusions could get in the way of a deal. The leading Democratic idea for fixing the program is to "raise the cap." Social Security taxes apply to the first $94,200 in wages. (That's for this year; next year it will apply to the first $97,500.) Any wages above that figure go untaxed. So Democrats want to apply the tax to a larger share of the wages of high earners, and maybe even to tax all wages. A Washington Post columnist recently wrote that getting rid of the cap would affect only "the richest 6 percent of taxpayers," and USA Today editorialized that it "would fix virtually the entire problem."

Citizens for Tax Justice, a left-wing group, has recently produced a study purporting to prove both of these points. But the group is exaggerating the good that lifting the cap would do, and downplaying its harm. In any one year, the change would affect 6.5 percent of taxpayers. But it would hit more than a fifth of workers with higher taxes over the course of their lives. And it would be a hefty increase. Cesar Conda, a former adviser to Vice President Dick Cheney, points out that the top marginal tax rate is now 38.4 percent. Hitting high earners with taxes for Social Security would raise that figure to 52.9 percent.