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RETIREMENT AND THE REPUBLICANS

11:00 PM, Jan 24, 1999 • By DAVID FRUM
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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.