THERE'S A WORST CASE SCENARIO for Social Security reform that haunts the White House. It goes like this. With great fanfare, President Bush announces his plan for overhauling Social Security, creating private investment accounts for every American worker, and making the system solvent. He touts his proposal in his inauguration speech, the State of the Union address, and his budget. But when Bush unveils an actual bill--probably in February, maybe later in 2005--congressional Democrats scream that it would cut Social Security benefits by 40 percent. Worse for Bush, a number of prominent Republicans agree and criticize the president's plan, especially the benefits change. The result: Social Security reform is dead on arrival on Capitol Hill.
Democrats are a problem. On modernizing Social Security, most of them are reactionary liberals, committed to preserving an antiquated system. But at the moment, Republicans are an even bigger problem for the White House. For a reform measure to win approval in Congress, Republicans must be united. True, the conventional wisdom in Washington is that entitlement reform requires bipartisanship. With only a handful of Democrats likely to sign on, however, that won't happen. So that leaves the matter with Republicans, and they are anything but together.
They're divided on the two biggest reform issues: how big a chunk should be carved out of payroll taxes for individual investment accounts and whether the growth of Social Security benefits should be curtailed. In the past, the White House suggested it might settle for 2 percent accounts. In other words, workers could invest up to 2 percent of their income using money from the 6.2 percent they already pay in payroll (FICA) taxes. Now the White House is expected to go for accounts as large as 4 percent. Or--and this is under discussion--the president could opt for a phase-in, leading to 6 percent accounts in 10 years.
Most Republican reformers insist on large accounts. The bill sponsored by Senator John Sununu of New Hampshire and Representative Paul Ryan of Wisconsin would instantly create 6 percent accounts. And they have a strong political argument. Since there's going to be a huge fight to get any private accounts at all, why settle for a piddling 2 percent? Why not go whole-hog and get what you really want? Sununu and Ryan have significant ties to the White House, where they've made this argument.
One can imagine a compromise among Republicans on the size of the accounts. A compromise on the more contentious issue of how to treat Social Security benefits is harder to imagine. The White House intends to deal with solvency by, as best I can tell, proposing to change the way benefits are calculated. Under current law, this is done by a "wage index." But since wages grow faster than inflation, so do benefits. Absent reform, benefits will be 40 percent greater in real terms in 2050. This is a major source of the system's impending insolvency. The White House would scrap the wage index in favor of a price index, which would calculate benefits by the rate of inflation. This would save trillions and still allow the president to say his plan would guarantee the current level of benefits adjusted for inflation--but no 40 percent increase in benefits. Bush, Rove, and others in the administration believe it would be irresponsible to reform Social Security but not its financing. For one thing, Wall Street would dismiss reform. "Wall Street wants to see some spinach with the dessert," Bush aides say.
That's not what Democrats will say. In fact, John Kerry declared in the presidential campaign that Bush's "January surprise" would be a 40 percent cut in benefits. As we've noted, there's some truth to that, though reduced benefits would be offset by investment account earnings. Of course, sticking with the current rate of benefit increase would require massive borrowing or a huge tax increase or both. Republican senator Lindsey Graham of South Carolina advocates 6 percent accounts paid for by boosting the cap on wages subject to payroll taxes from $87,900 to $200,000. This way, Democrats might support reform, he says. But Bush last week rejected any payroll tax hike.
Is this getting complicated? I'm afraid that can't be avoided. What's simple, though, is the argument of Republicans who want Social Security reform to consist of investment accounts alone. It's a purely political argument: Should Bush propose to slow the growth of benefits, Social Security reform is doomed. It just won't pass. Yes, the Democratic argument that Bush would cut benefits is demagogic. But it will generate sufficient opposition to kill any chance of reform. AARP, by the way, is already opposed.
The two camps reach beyond the White House and Congress. On the president's side is Glenn Hubbard, the former chairman of Bush's Council of Economic Advisers. Hubbard recently briefed Bush on reform issues. Others favoring action on the solvency side are influential economist Kevin Hassett of the American Enterprise Institute and ex-Bush economics adviser Larry Lindsey. Both are part of White House discussions. Opposed are Republican bigwigs Jack Kemp and Newt Gingrich, plus Steve Moore and Peter Ferrara of the Club for Growth and an unknown number of members of Congress, all of whom prefer to push for investment accounts alone. Critics call this second camp "free-lunchers."
Oh, yes. There's a third camp, those who would do nothing on Social Security because insolvency won't be a threat for a decade or more. House Majority Leader Tom DeLay has privately questioned whether it makes sense to tackle Social Security now. After all, Republicans worked for years to gain control of Congress. Why jeopardize that by provoking a fight over Social Security?
Sorry, but the fight is unavoidable. Bush made it so by emphasizing Social Security in his speech to the Republican convention last summer. At the time, he rejected advice that he scale back his plans for reform. Now he has to find a way to enlist wary Republicans. Rove has talked to both Kemp and Gingrich. Others, like Moore, may join Bush if that's the only way of getting private investment accounts. When six senators and 12 House members were briefed recently, a senior Bush aide said he "didn't sense there were a lot of free-lunchers in the room." So achieving Republican unity is possible. It's also necessary.
Fred Barnes is executive editor of The Weekly Standard.