Thursday, April 28, 2005

President Bush’s press conference

Clearly the big story tonight was Dubya’s passion to solve the looming Social Security problem. IMHO he had a strong grasp on the issue and the only thing I could possibly quibble about is that I wish he had noted that if nothing is done, there will be automatic across-the-board cuts for everyone once the Trust Fund runs out. (He did, to his credit, cite the CBO figure that every year without reform costs us another $600 billion in unfunded liability.) It looks like Bush is throwing his support behind the Robert Pozen plan of “progressive indexing.” In this plan, lower-income Americans will keep the same benefits formula which is largely indexed to wages while higher-income Americans will see a shift towards price indexing. In all cases, the future benefits for everyone will at least equal the current value of the Social Security benefit today. But since wage growth is typically larger than the rate of inflation, the wage growth benefit will be much larger in constant dollars in the future.

[Get ready for the Democrats to demagogue this point as a “cut” because for many workers they would receive less than the current formula offers. (Once again: nobody would receive less in constant dollars under price indexing.) In their mind, a 20% cut by design is much, much worse than an automatic 20% cut in the future.]

Despite Bush’s strong argument for personal accounts and expanding the “investment class,” I don’t think he really “moved the ball” on this issue. The opposition will continue to oppose as if that’s a badge of principle – well, good for them. My feeling all along is that the Social Security fight is a win-win proposition for President Bush. I know this concept confounds certain people, but Bush is fighting both the battle and the war. Even if reform is sent down to defeat, almost certainly by a Democratic filibuster, as a minimum Bush will have demonstrated leadership on a contentious issue and raised the profile of a fiscal crisis that will affect all Americans.

In fact assume that a Republican bill to reform Social Security does not pass through Congress. In every poll taken on this issue, the desire for personal accounts rises dramatically depending on age. With no government-sponsored personal accounts, younger Americans will see the handwriting on the wall and set up their own “add-on” accounts, pouring money into 401(k)s and IRAs. As time passes, it will become apparent that Social Security offers a very low (and in some cases, negative) rate of return. When the social and fiscal justification for Social Security as a retirement supplement becomes irrelevant, the political support for this Ponzi scheme will collapse.

I’ve said it before: if the Democrats truly want to save Social Security, they’ll engage the President, propose ideas, and try to shape the debate. They can defeat reform now, but the unchangeable reality of demographics and generational inequity will push working Americans into the investor class, one way or another.

Background: Fox News poll on President Bush and Social Security (story / poll)

Overall, fully 79 percent of the public think people under age 55 should have the right to choose between keeping all of their Social Security contributions in the current system and investing a portion of their funds. That support goes up to 84 percent among respondents under age 55.
And it’s approaching unity for the 30 and younger (aka the "automatic cuts") set.

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