RETIREMENT AND THE REPUBLICANS
11:00 PM, Jan 24, 1999 • By DAVID FRUM
IT MAY NOT LOOK LIKE IT, BUT THAT GUY, LYING all bloodied on the mat, surrounded by clumps of his own hair and fragments of his own teeth is actually winning the fight.
For three years, almost every important decision made by the Republican party has been framed by a terror of being demagogued by President Clinton on retirement issues, especially Social Security. It was with Social Security that, in 1995, he bludgeoned them during the government shutdown, and it was with Social Security that, in 1998, he intimidated them into cutting no taxes and increasing "emergency" spending by $ 20 billion. If ever a politician seemed to own a set of issues, Bill Clinton seems to own the issue of retirement security. And yet, while Clinton uses Social Security to score partisan points, he is steadily losing on the issue itself.
To see how badly, look backward at where we have been. The last time Congress made any major adjustment to the Social Security program was 1983, when the Greenspan Commission delivered its report on the crisis of the retirement system. The problem then was the same as the problem now: There will not be enough workers to support the expected number of retirees after 2010 without a big increase in taxes or borrowing. And what solution did Alan Greenspan -- no bleeding heart liberal -- recommend? A big tax increase, effective right away, and an increase in the retirement age, effective only for the very youngest workers, who (presumably) weren't paying attention.
Back then, there was no shortage of smart people proposing privatization as the best way out. Peter Ferrara published his first book on Social Security in 1979, and it did not languish for lack of attention. Ideas do have consequences, just not right away. Thus, in the early 1980s, advocating privatization still looked to most congressmen like an unnecessarily painful way to commit political suicide. Even Ronald Reagan -- hardly a shrinking violet -- was brought to heel, as Richard Darman triumphantly recalls in his memoirs:
He had long argued that Social Security should be voluntary. [Now] he sought (and was soon to get) the prompt enactment of an agreement [that] promised to preserve the integrity of the governmental Social Security system for generations to come. It was a roughly half-and-half mixture of benefit reductions and tax increases.
But what was undoable -- and unsayable -- then is now freely said. Today, Democrats in Congress, for example Bob Kerrey and Daniel Patrick Moynihan, have endorsed some measure of privatization. An idea that in Reagan's time was treated by the media as lying on the far side of ketchup-as-a-vegetable is now reported on with attention and respect. Nobody is guaranteeing that privatization or semi-privatization will happen. But that it should happen has, as Michael Barone observes, become the conventional wisdom. What changed? And what political lessons can be drawn from this change?
The first great change since 1983 is that hard experience has exposed the inadequacy of the benefit-cutting and tax-raising approach to the Social Security problem. In 1977, the FICA payroll tax consumed 11.7 percent of the first $ 16,500 of wages (half of it deducted from the workers pay; the other half taken from the employer). Today it gobbles up 15.3 percent of the first $ 64,000, and then 2.9 percent of everything beyond $ 64,000, even as younger workers have had their retirement postponed from age 65 to age 67. And yet, despite this enormous tax hike and this very real reduction in the value of Social Security benefits, the system is no sounder than it was twenty years ago. Nothing so discredits an idea as complete and utter failure.
But even the most discredited idea can hang on to life, so long as there is no workable alternative. The 1,000 percent increase in the Dow Jones average since 1983 -- the second great change -- has pushed a workable alternative into plain view. Everybody now understands what only a few historically minded economists believed in 1983: that the stock market is the best place to put retirement savings. In 1982, when the Dow Jones average was lower than it had been in 1966 -- even before adjusting for sixteen years of high inflation -- Social Security, for all its problems, still looked like a decent bet. Today, the merits of privatization are obvious to each and every one of the 50 million Americans who own shares in mutual funds.
This spreading public enlightenment was not entirely a spontaneous phenomenon. The third great change that has made privatization feasible is the stunningly successful campaign of public education conducted by advocates of reform. When Ira Magaziner dreamed up his intricate health-care reform, Daniel Patrick Moynihan warned him that bold new policy departures pass the U.S. Senate by a 70-30 margin or they don't pass at all. In the Reagan era, Social Security tinkerers like David Stockman met with disaster for the same reason: They tried to alter the system suddenly and surreptitiously.
To amend an institution that has been around for half a century and that an entire society relies upon for its security in old age, a broad consensus is necessary. The real battle over the future of Social Security will not be conducted on the floor of Congress: It will be fought in newspaper columns and in television debates. Ross Perot used to ask: "Are we going to talk about it or are we going to do it?" In a democracy, talking about something is doing something. After sixteen years of talk, millions of Americans now understand that Social Security is in trouble and must be fixed. That's an incredible achievement; without it, Social Security reform would seem as esoteric a cause as it did a decade and a half ago. And it isn't only the general public that has to be educated: It's the elites as well.
SOCIAL SECURITY HAS OFTEN BEEN CALLED A PONZI scheme, but in one way it's more like a shell game. Social Security works by distracting the eye. As you try to keep up with the motions of the trust funds (the shells), you lose sight of what counts: the money from payroll taxes (the pea), which the government (the con man) has palmed.
Currently, the payroll tax is raising much more money than is needed to pay the pensions of Social Security's beneficiaries. This money is deposited in the federal Treasury and used the way the rest of the money there is used: to pay for cruise missiles, highways, and presidential attorneys. In return, the Treasury gives the Social Security administration a promise to repay the money in thirty years. These promises are collectively known as the "Social Security trust funds." This transaction is -- as most of us have gradually realized -- entirely unreal. The money raised by the payroll tax is immediately spent.
When the time comes to pay the baby boomers' pensions, the money will have to be raised from the taxpayers of the day. The elaborate rigmarole of the trust funds does not alter that simple fact. All it does is blind us to the otherwise glaring truth that the problem begins in 2010, when Social Security's costs will start to outrun the revenues from the payroll tax, not in 2030, when the program's accumulated deficit exceeds the IOUs from the Treasury Department. But so long as Washington was blinded, even a man as lucid as Alan Greenspan was obliged to pretend to believe that by piling up bigger and bigger payroll tax surpluses today, we were somehow contributing to a solution to the problem of Social Security after 2010. It would not be quite accurate to say that nobody believes that sort of nonsense now. But the ranks of those who do have certainly thinned.
So the momentum is with the White Hats. Meanwhile, over at Black Hat headquarters, the situation is bleak. They are not yet convinced that the status quo is untenable. You still hear the old troglodytes whispering among themselves that with just a bit of a tax increase and maybe a dollop of inflation, FDR's creaky old wheels can keep on turning. They have no workable alternative: Their version of a big idea is to have the U.S. government invest some of the trust fund in the stock market on behalf of Social Security recipients, as if the demerits of state ownership of the means of production had not already been thoroughly explored in this century. They are not building a public consensus, relying instead on stoking the fears of the elderly. Nor are they having much better success with the elites, who are not fooled by a president who makes a big show of demanding action on Social Security without ever offering any ideas of his own.
Calling on Congress to "save" Social Security while refusing to do any of the heavy lifting himself is vintage Clinton. Odds are, the president will repeat that gambit in his State of the Union message. His hope may be that Congress will overreach, discredit privatization by acting before the emerging consensus in its favor has coalesced, and thus save the otherwise doomed troglodyte approach to Social Security. Reform proponents -- who have made their case with splendid effectiveness up until now -- are going to need to muster all of their self-discipline to resist the temptation to win this fight the wrong way, before a broad consensus in favor of reform has been cemented. Senator Phil Gramm has wisely suggested that any reform plan should offer those Americans already in the work force the choice to remain enrolled in the traditional system if they prefer. It's this sort of reassurance that will make the difference between ultimate success and failure.
Well, maybe not "ultimate." There is no ultimate anything in politics. After all, if the reformers win on Social Security, they can expect only a weekend off before they have to work on something really hard: Medicare.
David Frum, a contributing editor to the THE WEEKLY STANDARD, is completing a book on the 1970s.