The Electric Commentary

Wednesday, January 05, 2005

The Social Security Battle Rages On

First read this article by Andrew Sullivan in The New Republic:

Recall 1992. Bill Clinton had a simple choice between two large and difficult reforms. One was related to health care; the other to welfare reform. The health-care project warmed the hearts of the president's liberal base; it had proven an electoral winner in states like Pennsylvania; it was dear to the co-president, Hillary Rodham Clinton. Welfare reform, in contrast, offended a large chunk of the Democratic base; was unpopular among many congressional Democrats; and was just as difficult to get through Washington. So Clinton chose health care. He chose wrong. It cost him the Congress in 1994, and the health-care debacle dented the centrist image that Clinton had worked so hard to secure for the Democratic Party. If he had reversed these priorities, who knows what he might have achieved--both for the long-term prospects of the Democratic Party and for the country as a whole?

I may be wrong, but I'm getting a feeling of déjà vu with George W. Bush's first major second-term decision. He has clearly decided to make Social Security partial-privatization the centerpiece of his second term. The alternative would be a real attempt at tax reform--simplification, the eradication of loopholes, and reduction in basic rates--1986-style or even more ambitious. Both ideas are ambitious ones; and neither would be easy. Doing both at once is a nonstarter. But doing Social Security first strikes me as a big, Clinton-style mistake. And for somewhat similar reasons.

Then, read this article by Arnold Kling:

I think that among those who understand the economics of Social Security, there is generally a consensus that:

1. The key driver of Social Security sustainability is the ratio of workers to retirees, which is falling. Some gradual reduction in benefits or increase in taxes is required. This is largely a separate issue from privatization, and is probably more important.

2. Privatization, to have any positive effects, must increase the incentives for work and thrift.

3. The impact of the "transition cost" depends on how in the financial markets the short-run increase in debt is perceived relative to the long-term reduction in liabilities.

It seems to me that when someone takes a strong stand on privatization one way or the other, their views are driven mostly by their feelings about President Bush. People who are more detached politically tend to be more ambivalent about privatization. Overall, I get the sense that the Bush backers have much less passion than the Bush opponents, at least when it comes to this issue.

Between these two article I think they capture a few fundamental truths. The political will to actually reform social security may not be there, and attempting serious reform may indeed be counterproductive.

On the other hand, that doesn't make it a bad idea per se. Privatization is not a cure-all, but would eliminate Arnold's "Problem 1." And the "transition cost" is more a matter of perception than reality, as that cost will come due sooner or later whether or not we enact any reforms.

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