Jostling
Over the Third Rail
The National Journal
New ideas emerging in the race for the White House could help revive the stalemated debate over the long-term health of Social Security after the next president takes office. But old partisan disagreements also resurfacing underscore the hurdles that any renewed drive for reform would face.
In some of the campaign exchanges, candidates on each side have taken bright-line positions against raising taxes or cutting benefits that could make it difficult for them to assemble a bipartisan deal on Social Security if elected. But on balance, many experts say, it appears that the contenders are opening slightly more doors on Social Security than they are closing. That is raising hopes that the next president can construct an agreement to ensure the lasting financial stability of the program -- an achievement that eluded both George W. Bush and Bill Clinton.
"At the moment, I have chosen to be optimistic," says Robert L. Bixby, executive director of the Concord Coalition, a nonpartisan group that promotes fiscal responsibility.
Social Security has attracted a surprising amount of attention in the presidential campaign, especially after the recent reminder that the issue, often described as the "third rail" of American politics, retains its power to singe. Only two years ago, Bush's attempt to restructure the system, largely by introducing personal investment accounts that Democrats viewed as partial privatization, collapsed without reaching a vote on the House or Senate floor. Many analysts believe that the backlash against Bush's plan, evident in polls, contributed to the president's precipitous second-term slide in popularity.
But this year, contenders in both parties have jumped back into the debate. Reverting to the default position of politicians who want to avoid discussing too many details, several leading candidates -- from Democrats Hillary Rodham Clinton, Barack Obama, and John Edwards to Republican Rudy Giuliani -- have pledged as president to appoint bipartisan commissions to strengthen the system, which now provides benefits for 54 million Americans.
Yet that hasn't prevented the contenders from offering, and arguing about, specific options for change. While the Democrats have engaged in the sharpest arguments over the issue, the most detailed proposal has been offered by a Republican, former Sen. Fred Thompson of Tennessee.
Thompson released a plan in October that he said would eliminate the long-term gap between the system's revenue and the benefits it has promised to pay. The Social Security trustees, in their latest report last spring, estimated that the shortfall over the next 75 years will be $4.7 trillion, an amount equal to 0.7 percent of the gross national product during that period. The trustees projected that the system will pay out more than it raises in revenue by 2017, and will exhaust its trust fund by 2041; at that point, it will have revenues sufficient to cover only 75 percent of promised benefits.
Thompson centered his plan on three elements. Today, the initial guaranteed benefit a worker receives at retirement is linked to the growth in wages; Thompson proposes to tie future benefits to the growth in prices. Because prices don't increase as fast as wages, that would steadily reduce the benefits guaranteed to future retirees.
Thompson would offset that loss with government tax breaks to help workers establish retirement accounts they could invest in stocks and bonds. Thompson would allow workers to contribute to the account as much as 2 percent of their income up to an annual ceiling. The amount of income eligible for the account would be set to match the cap on annual earnings subject to the Social Security payroll tax, now fixed at $102,000 for 2008.
Under Thompson's plan, Washington would provide a more generous match for the money that workers invested from their first $1,000 in earnings every month, and a smaller match for eligible earnings they contributed above that. Workers who accepted the match, however, would face further reductions in their guaranteed Social Security benefits.
In the third element of his proposal, Thompson would transfer about $50 billion a year from general revenue to the Social Security trust fund. He says that would reflect a small share of the additional taxes government can expect to collect from the increased investment and economic activity that the subsidized investment accounts would generate. "It is a very cautious estimate of how much extra tax revenue will be flowing in," says Thompson adviser Larry Lindsey, who directed the National Economic Council for President Bush and helped devise his Social Security plan during the 2000 campaign.
In all, Lindsey says, the reductions in guaranteed benefits in Thompson's plan would eliminate about half of the system's long-term shortfall, and the revenue transfer would cover the rest.
Thompson's campaign has calculated that an average worker who accepted the match and then converted his or her investment account into an annuity upon retirement would receive a total monthly benefit of about $3,000. That would be about 50 percent more than workers are now promised under Social Security, and about twice what the system can afford to pay on its current financial trajectory, according to the campaign's calculations. "With the amount of money that you accumulate," Lindsey insists, "you can more than make up for the reduction in [guaranteed] benefits."
But defenders of the traditional Social Security program say that the cuts in guaranteed benefits Thompson has proposed would expose retirees to too much risk if their investments don't perform. In fact, they note, Thompson's proposal would reduce guaranteed benefits by more than the so-called Pozen plan that Bush embraced in 2005.
That proposal, designed by Robert Pozen, a former vice chairman of Fidelity Investments, would maintain the more generous wage indexing of benefits for low-income workers, switch to price indexing for the affluent, and calculate benefits with a blended approach for those in between. Contrast that with Thompson's proposal to switch to price indexing for all workers, which over time would yield guaranteed benefits as much as 50 percent smaller than future retirees have been promised today, according to some projections.
"For people who are young, this is a very, very serious benefit cut," says John Rother, executive officer of policy and strategy for AARP, the giant seniors' lobby. "It would dramatically change the whole traditional idea of what Social Security is supposed to be."
Although Thompson's indexing plan is stirring resistance, his approach to investment accounts has drawn a more favorable initial reaction from some of the groups that fought Bush's plan. Unlike Bush, Thompson has not proposed to fund his investment accounts by diverting some of a worker's payroll tax; those "carve-out" accounts are anathema to Democrats and their allies. Not a single House or Senate Democrat endorsed Bush's carve-out proposal.
Instead, Thompson's accounts would function as an "add-on" to a worker's Social Security benefit. In that sense, they are similar to the subsidized retirement savings accounts that Bill Clinton proposed during his second term, and that leading Democratic contenders such as Hillary Clinton, Obama, and Edwards have all endorsed today. Thompson's plan also aligns with the Democrats' in providing greater subsidies for lower-income families.
Yet Thompson's plan differs from the Democratic proposals in reducing guaranteed Social Security benefits for workers who accept the investment subsidies. That could make the package more attractive to conservatives, who tend to view the Democratic savings proposals as the creation of another federal entitlement. Lindsey calls Thompson's proposal "a hybrid" between the "carve-out" and "add-on" alternatives, and some veterans of the Social Security struggles believe that it could prove attractive to both parties.
In designing the accounts, Bixby says, "Thompson did a good job of getting around some of the trench warfare.... I think that was a good innovation in his plan." Adds a Democratic economic policy expert who asked not to be identified: "The account portion of his plan is a more promising place for starting a discussion than Bush's [proposal]."
While Thompson has presented a detailed and comprehensive Social Security plan, the other candidates have offered episodic opinions on diverse aspects of the puzzle. Former Massachusetts Gov. Mitt Romney has praised Bush's "carve-out" proposal for establishing private accounts and (like Thompson) has opposed raising taxes as part of any long-term solution. Giuliani drew an even sharper line when he told the conservative Club for Growth in October that he would flatly "rule out" tax increases for Social Security. No Republican candidate, in fact, has said he would accept tax increases in an overall Social Security package.
Yet the tax debate is evolving, too. Historically, proposals to raise more revenue have focused on extending the payroll tax to the next slice of earners just above the cap (which now increases each year by a factor also linked to the growth in wages). Simply increasing the cap in that manner, though, worries some Democrats, who believe it will leave the party open to charges of raising taxes on the relatively middle-income families who have provided Democrats with more support over the past 15 years.
This year, Edwards offered a twist that could increase the appeal of raising the cap, especially among Democrats. He has proposed a "doughnut" approach, under which annual earnings roughly between $100,000 and $200,000 would remain exempt from Social Security taxes, but income above that level would face an additional levy. "There are a lot of firefighter couples, for example, that make $100,000, $115,000 a year," Edwards said during a September debate. "We don't want to raise taxes on them. But I do believe that people who make 50, 75, 100 million dollars a year ought to be paying Social Security taxes on that income."
As that language suggests, Edwards's advisers say that he is inclined to tax all income above $200,000. But he hasn't decided whether the additional earnings would be taxed at the full individual 6.2 percent Social Security rate, which would represent a biting tax increase for the most-affluent earners, or a lower rate, such as the 1.45 percent Medicare tax that now applies to all earnings.
Nor, advisers say, has Edwards addressed the knottiest question involved in taxing income above the current cap: whether to include those contributions in calculating Social Security benefits for future retirees. If such taxes are included, affluent retirees could receive substantially larger monthly checks, an unattractive possibility for a system facing financial strain. If taxes aren't included, it would sever the historic link between contributions and benefits. "Then they have finally turned Social Security into a welfare plan," Lindsey contends.
At various points, Obama has expressed sympathy for the doughnut idea, for completely lifting the tax cap, and for the more traditional approach of slightly increasing the cap. Clinton hasn't endorsed any tax increase proposal: She has argued that raising the cap would burden middle-class families and that eliminating it would impose a "trillion-dollar tax increase." In October, a reporter overheard Clinton telling an Iowa voter that she would consider raising the cap through a doughnut system, and in a recent debate she said that such an approach might be one idea a bipartisan commission could consider. But she hasn't embraced the idea more firmly than that, although Gene Sperling, a top economic adviser to both the senator and former President Clinton, was among the notion's original proponents.
Despite all of that, many party experts believe that any Democratic president would inevitably propose an increase in the cap, probably through the doughnut approach, if he or she pursues Social Security reform after 2009. The contenders' attitudes toward benefit reductions have been noticeably cooler. In a mirror image of the Republicans on taxes, no leading Democrat has explicitly said he or she would accept benefit reductions as part of an overall Social Security package.
Edwards has flatly opposed any benefit cuts. The two leading Democrats have sent mixed signals. Last spring, Obama and Clinton began in opposite corners. Initially, in an interview with ABC's This Week in May, Obama said that "everything should be on the table" in Social Security negotiations, including an increase in the retirement age. Bixby and many other fiscal hawks believe that such a move -- perhaps by indexing the retirement age to increases in longevity --could be a valuable part of an eventual Social Security solution, but the idea consistently provokes formidable public resistance in polls. Clinton quickly denounced Obama -- "Raising the retirement age is not the answer," she told AARP -- and seemed to reject any benefit cuts while arguing that fiscal discipline was the key to stabilizing the system.
More recently, Clinton has resumed her criticism of Obama for considering both tax increases and benefit reductions, and she has accused him of adopting "Republican talking points" in speaking (to National Journal) about a Social Security "crisis." She also told voters last month in New Hampshire that it was "a mistake" for Democrats to offer details before a bipartisan commission can be appointed, because those ideas will only draw attacks. In effect, Clinton has already validated her prediction with her sharp criticism of Obama for floating specific proposals.
The pointed exchanges between the Democrats have convinced some experts that the senator from New York is right on at least one point: The less said about Social Security during the campaign, the better. "This is a cynical view, but I don't want presidential candidates laying out detailed plans ... because it guarantees that other candidates will attack those ideas," said Robert Greenstein, executive director of the Center on Budget and Policy Priorities, a liberal think tank. "The atmosphere is so partisan now that laying out a detailed plan will actually make it harder to get a bipartisan agreement after the election is over."
Still, Bixby finds reason for optimism -- partly in what's not being said. Although no Republican has endorsed a tax increase and no Democrat has proposed specific benefit reductions, he notes, few in either party have gone as far as Giuliani or Edwards in ruling out the other side's priority. That is critical because, for both fiscal and political reasons, any long-term Social Security stabilization plan will almost certainly need to blend both, Bixby and many other experts contend.
"In any sort of negotiation, there is going to have to be new revenue coming into the system and there is going to have to be a reduction in promised benefits," Bixby says. "It is implausible that you could get one without the other."