Clinton's Dangerous Flirtation
By Robert Kuttner
Now, well-placed sources say, Clinton is wavering on the key issue of privatization. The White House likely will unveil its approach in time for the State of the Union message in January. Clinton had told his staff that he wants to be able to say he fixed Social Security's finances without new taxes or cuts in benefits and that he is willing to embrace partial privatization if it will produce those results.
One approach under close study at the White House is a proposal by Martin Feldstein, the conservative Harvard economist who was the chairman of President Reagan's Council of Economic Advisers. Feldstein long has argued that Social Security, as a system of government old-age pensions, depresses private savings.
Under Feldstein's plan, payroll taxes would be diverted from Social Security and the budget surplus would be spent on private retirement accounts financed by tax credits. Your income taxes would be cut by one dollar for each dollar you put into a personal retirement account, up to a set limit. Your Social Security benefits would be cut accordingly.
Weirdly, Feldstein's plan in effect makes the government the guarantor of your stock market performance. If your portfolio did well, you could take those gains and take less Social Security. If you didn't fare so well in the market, you could opt for more Social Security.
What a deal for a conservative to embrace -- government guaranteeing the stock market. Says Roger Hickey of the Social Security Information Project, "It's classic lemon-socialism," meaning the government absorbs the downside risks ("lemons") and leaves the private sector with all the upside gains ("socialism"). This approach also depends on endless budget surpluses. But surely there are better candidates for public spending than stock-market bailouts. Nor is it guaranteed that those surpluses will last forever.
Indeed, in the next recession, tax receipts will fall, the need for offsetting public outlays will rise and there will likely be at least temporary deficits. Further, any form of privatization undercuts the anti-poverty benefits of the current Social Security system.
The present system deliberately provides extra payouts to lower-income retirees and the widows of breadwinners. With privatization, payouts would more explicitly reflect moneys paid in, and needy retirees would do relatively worse than under today's public system.
Politically, even partial privatization would fragment the coalition of rich, middle class and poor that supports the present program and begin a gradual slide to full privatization. June O'Neill, the Republican director of the Congressional Budget Office, has testified to Congress that the Feldstein proposal actually would reduce national savings rates (because it would consume the budget surplus) and increase tax burdens on future workers.
It's understandable why Wall Street would support this approach -- it generates nice fees, and it pumps up the stock market. But why would Clinton? Clinton wants to go down in history as the president who rescued Social Security. As a self-styled "New Democrat," he also likes approaches that move away from New Deal programs. And he needs a package that the still-Republican Congress can support.
A deal such as the Feldstein plan, which includes tax breaks to finance new private accounts, would allow the Republicans to claim that they used the surplus for tax cuts; it would allow Clinton to declare that he used the surplus to save Social Security and the Republicans to share that credit. It's clever partisan politics -- until you remember that it's the workaday Democratic rank-and-file that depends on the current Social Security program. And it's atrocious policy.
The Social Security system has served three generations of Americans, and its finances can be shored up without resorting to privatization or to tax-credit gimmicks. The White House is flirting with a scheme that is pure mischief. Democrats, who just won an election by promising to save the real Social Security system, should tell the president so.
The writer is co-editor of the American Prospect.
© Copyright 1998 The Washington Post Company