A Social Security Tightrope With a Torn Safety Net
By Allan Sloan
Tuesday, December 21, 2004; Page E03
President Bush's economic conference last week was a great show -- if you like watching sales meetings. The conference, billed by the White House as a "frank discussion" about the president's economic program, was really a two-day infomercial that was short on "info," long on "mercial." Attendees, who had been screened by the White House, applauded at all the right places. Bush closed the conference with a dire warning about Social Security. "The longer we wait," he said, "the more expensive the solution becomes. The crisis is now."
I wasn't invited to the meeting, of course. But if I'd had a shot at the microphone, I'd have asked Bush why he thought Social Security was a crisis requiring immediate action but was ignoring a far larger and more immediate problem. To wit: the one he created a year ago when he pushed a Medicare prescription drug plan through Congress without providing money to pay for it.
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Everything's relative. Bush talked about Social Security being a $10.4 trillion problem. That's how much money you'd have to give Social Security today for it to continue paying benefits indefinitely under its current formula. But the shortfall in Bush's Medicare drug program is $17 trillion. In other words, the problem that Bush himself created a year ago is two-thirds again as large as Social Security's problem. What's more, the drug plan starts costing taxpayers big bucks just a year from now, in 2006. We'll borrow it, of course. Social Security, for all its flaws, will take in more than enough cash to pay for itself for a dozen years even if nothing changes. So which is a "crisis"? A $17 trillion problem that starts next year, or a $10.4 trillion problem that starts in 2018? You don't need a math genius to answer that question.
I've written for years that Social Security has big long-term problems that need to be addressed, and the sooner the better. I praised Bush during the 2000 campaign for daring to broach the topic. My problem with Bush's proposal -- or more accurately, with what I expect him to propose, since nothing formal has yet emerged -- is that he's using fuzzy math to promise a free lunch. He rhapsodizes about private accounts -- but doesn't mention that the trade-off is a cut of 40 or 50 percent in Social Security's guaranteed benefit.
If absolutely nothing changes, there will be a Social Security "crisis." But you can put the program back on course with a few tweaks -- including small private accounts, if you like. You can raise the retirement age; modify the benefit formula; raise the wage base on which Social Security taxes are collected ($90,000 in 2005); trim payments to high-end folks like me. Bush, though, has ruled out many of these remedies because he wants to make good on his pledge not to change benefits or raise taxes.
Bush would put a big hole in the Social Security safety net at the very time that corporations are doing the same with pensions. Companies are dumping "defined benefit" pensions based on salaries and replacing them with plans that force employees to bear the risk of investing successfully. If we hadn't had a bull market spanning an entire generation, no one would dare propose letting tens of millions of unsophisticated investors risk Social Security money in the stock market. The bull, born in 1982, died almost five years ago, but fond memories of it linger.
Even as Bush urges average people to trust Social Security money to the market, big-time players like corporate pension funds are growing less optimistic about what the future holds. "The people running these funds know that the bull market's over, and they have been reducing their earnings estimates for the past three years," says Chris McNickle, a managing director of institutional financial consulting firm Greenwich Associates. General Motors, one of the most highly regarded among American firms for its pension management methods, , has trimmed its holdings of U.S. stocks and bonds. "We wanted to reduce our exposure to large swings in the market," says GM spokesman Jerry Dubrowski.
If Bush really wants to have a meeting of the minds about Social Security, he might consider talking with people who have views different from his. And he might want to do something about his prescription drug program before it eats us all alive.
With Holly Bailey in Washington. Sloan is Newsweek's Wall Street editor. His e-mail address is sloan@panix.com.
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