Retirement programmes: extreme makeover
With his mandate re-affirmed, Bush has prioritised two ambitious goals within the ‘ownership society’ – privatising social security and revamping the private pension system. Such boldness is not rhetorical: Bush’s previous term demonstrated a commitment to his fundamental agenda. The President has not previously shied from audacity; having been re-elected, expect indifference (and possible hostility) toward Washington’s tacit and longstanding rules – even in the once-taboo case of retirement programmes.
Of the two programmes, the private pension system is in worse shape. Corporate reserves are collectively several hundred billion dollars short of the amount needed to secure benefits and the pension benefit guaranty corporation – a government funded pension backstop – is running a deficit. Bush’s proposal incorporates both increased insurance premiums from sponsors and a funding deadline. With failed pensions, the government will provide limited benefits – less than what would be expected in high-paying, jeopardised industries like airline and steel. The plan forces a private sector shift of retirement responsibility to individuals: increased premiums and government scrutiny will cause companies to focus more on programmes like the 401(k), in which employees provide both funding and decision-making.
Of course, privatising social security poses a greater imposition of individual responsibility. The plan calls for a portion of payroll taxes to be invested privately, on a voluntary basis in selected accounts. Upon retirement, investments would be paid in an annuity accompanying scaled-back social security benefits. It is not yet clear how the reductions would take place, but Bush conspicuously mentioned “limiting benefits” in the State of the Union.
As components of the ownership society, restructuring social security and the private pensions could parallel FDR’s new deal, with ramifications for several generations. Having begun a historic mission in Iraq, Bush has turned his attention to an equally profound domestic commitment. Bush’s legacy may rest on two initiatives: one far away and the other at the domestic core – each with enormous long-term implications.
Besides scale, other comparisons between Iraq and programme overhaul seem inevitable. Like missing WMDs, raising the spectre of a crisis behind social security as a catalyst for change is tenuous. While experts agree that the programme will start running a deficit at some point, there is little consensus on when this will be – and even less on when the programme will bankrupt its current $1.5trn surplus of US treasury bonds.
The discrepancy between predictions is due in part to the nature of long-term economic forecasting; if it is difficult to make accurate predictions of the economy five years from now, 40-year projections certainly seem suspect. However, having identified a looming crisis, Bush has begun honing his response with characteristic resolve – remarking in the State of the Union: “If you’ve got children in their 20s, as some of us do, the idea of social security collapsing before they retire does not seem like a small matter. And it should not be a small matter to the US Congress.”
Overhauling these programmes will be expensive and the administration has begun to discuss ‘transition costs’. But total costs seem both uncertain and considerable. These costs, which would pay retiree benefits while younger workers transferred to private accounts, could total up to $2trn. Transition costs may add to the federal deficit – already ballooning from the President’s first term.
Considering the philosophical departure from previous programsme, cost of overhaul and numerous comparisons to Iraq - administrative dogmatism, uncertain funding and future implications – it is not surprising that support has been tepid. At the moment, it is unclear how many politicians are willing to stake their careers on the issue. However, Bush’s influence could prove overwhelming – particularly when he begins spending hard-won ‘political capital’.
With a bitter climate in Washington, Democrats seem singularly focused on defeating plans for overhaul. This lack of bi-partisanship may be unprecedented, as evidenced by Democratic booing when social security was raised during the State of the Union. Such unified opposition is partially due to conditions on Capital Hill: surviving Democrats regard the retirement programme conflict as a rallying point for their shell-shocked party. This environment provides little cover for moderate Democrats, preventing bi-partisanship critical with such a major initiative.
Of course, the lack of support is not strictly ideological: the plans are conspicuously opaque and could cost seats on both sides of the political aisle. The group most exposed to reduced benefits are those too young to enjoy government guarantees but too old to gain under privatisation, aged between 45 and 55 years old. This group encompasses those born in 1957 – the peak of the baby boomer generation – who turn 48 this year. Distressing this influential constituency could be fatal for any politician, a point reflected in the macabre nickname for social security: the ‘third rail’ of politics. The safe harbour for those over 55 has also been challenged: the website for the American Association of Retired Persons, a powerful lobby, features several strident articles against privatisation.
Hazards in supporting reform have greatest effect in the house, where representatives seek re-election every two years. Despite regimented leadership from the White House, Republican representatives have joined Democrats in denouncing reform. Republican Bill Thomas, chairman of the House Ways and Means Committee, said of privatisation: “I’m looking forward to positive discussions and not a continual beating of what will soon be a dead horse of their proposal.”
That an influential member of Bush’s party would refer to a primary objective as a dead horse is remarkable and signifies the challenges ahead. However, Thomas raised similar concerns over the GOP’s Medicare reforms of 2003 – before ultimately passing them. The outcome is unpredictable: Bush has vigorously mobilised his resources. This time the target is not thousands of miles away overseas, but right in the wallet of the American people. Perhaps a compromise, raising the retirement age or price indexing benefits, would be an acceptable way to allow for privatisation with minimal disruption to the current system.