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Democrats in Denial

By Steven Rattner
Sunday, January 30, 2005; Page B07

In his 1998 State of the Union address, President Bill Clinton waved his pen at the assembled Congress and declared that we must "save Social Security first." Democrats have since generally clung to that vision.

But now, in an ill-conceived effort to derail President Bush's privatization initiative, many prominent Democrats are suddenly dismissing the notion of a Social Security crisis or even a Social Security problem. Instead of offering sensible alternatives to the president's flawed proposals, Democrats are devoting their energies to attacking both the president's ideas and any notion of altering the Social Security construct.

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We can debate endlessly what constitutes a "crisis" but not that Social Security faces a major financial challenge. According to actuarial estimates by the system's trustees, Social Security costs will begin to exceed revenue beginning in 2018 -- not so far off.

That would have been less daunting had we saved the very substantial Social Security surpluses of the past two decades. Instead, we mostly spent them, particularly in the past four years, leaving behind a much-touted Social Security trust fund that is, in reality, a myth.

All that resides in the trust fund is a $1.5 trillion pile of IOUs from the federal government, obligations likely to be honored by increasing the national debt. In addition, according to the trustees, we would have to deposit an additional $3.7 trillion into the trust fund today to ensure solvency until 2078. Is that a crisis or just a problem?

To be sure, Social Security is only our second-biggest fiscal challenge; first place belongs to Medicare, where the projected gap between revenue and benefits is even larger. Also, unlike Social Security, where at least the benefits can be reasonably estimated, knowing the cost of Medicare a decade or two from now is quite difficult, because the cost of health care and the extent of health care options both keep growing at enormous rates.

But whatever the problems of Medicare, if Bush wants to start by fixing Social Security, the proper response from Democrats should be constructive alternative solutions rather than demagogic rhetoric. Lord knows, policy wonks have put forward plenty of interesting ideas to pick from.

We must remember that the current bleating about private accounts, transition costs and the ownership society masks the reality that unless we are going to force our children to pay for our retirements -- a really unattractive alternative -- the Social Security problem can't be solved without raising revenue or cutting benefits.

That should be an easy choice. The American dream is that each generation should enjoy a better life -- including retirement -- than the previous one. Even some of the more benign ideas for trimming the costs of Social Security, such as raising the retirement age or cutting back benefit increases to the rate of inflation rather than the rate of wage increases, would chip away at that principle.

We should not shirk from raising more revenue for Social Security, by such means as moving up the cap on annual earnings subject to the tax, now at $90,000. That would be highly progressive, particularly if we put the money into a true trust fund -- one that would represent a new form of desperately needed national savings.

The move toward a real trust fund would be facilitated by investing some of the Social Security surplus in stocks and bonds instead of allowing the money to be spent and replaced by the pile of IOUs.

Broadening the investment mandate of Social Security, as Clinton proposed, would have a further benefit: higher returns, which in turn would reduce the amount of additional revenue needed to maintain current benefit levels -- the closest thing to a free lunch.

Let's not forget that virtually every state and local pension plan -- as well as plans for Federal Reserve agencies and other government entities -- is invested in assets that Democrats brand as risky. For Social Security, we could limit investments to broad market indices rather than individual stocks or bonds, thereby providing greater safety and eliminating political complications.

Democrats should be able to endorse an approach of this sort as yielding virtually all of the benefits of individual accounts without the drawbacks associated with privatization. Maintaining a single fund keeps administrative and transaction costs low, spreads the inevitable risks of investing across both longer time frames and the entire population, and almost certainly results in superior performance compared with individually managed accounts.

We face decisions on Social Security of enormous consequence. For Democrats to devote the preponderance of their energies to attacking the president's plans or to denying that action is required is to do themselves and the country a disservice.

The writer is managing principal of Quadrangle Group LLC, a private investment firm.

© 2005 The Washington Post Company