Reforming Social Security Just Got a Lot Harder

President Bush just won a huge victory with passage of a $1.35 trillion tax cut. But the price was steep: Control of the Senate, for one. Bush and his congressional allies got their bill, but their hardball tactics cost them the support of Senator James Jeffords, the Vermont Republican who has now chosen to vote with the Democrats. 

The biggest casualty, however, may have been Social Security reform, once a top priority for the President. Bush's plan for private retirement accounts was already in trouble -- last month, he created a study commission to get the idea percolating. Now, with the tax bill signed, sealed, and delivered, congressional Democrats are hardly going to be in a mood to take it off the back burner. 

SOARING SHORTFALL. Ugly politics may be the least of Bush's Social Security problems. The economics may be much worse. Like the starving farmer, Bush may have eaten his own seed corn. Why? Because he's probably going to need tax dollars to fund any shift to private accounts. And, thanks to the tax bill, 1.35 trillion fewer of those dollars will appear in the federal Treasury over the next decade. 

Here's the problem: The current Social Security system does not have enough money to fully fund all the benefits that government has promised to the Baby Boomers. In fact, it will fall about 20% short over the next decade. 

Under the plan Bush laid out in his campaign, workers would be able to reduce the amount of payroll taxes they pay into the system and transfer those funds into their own accounts. But that will create an even greater shortfall. For example, diverting 2% of payroll tax into private accounts would leave the Social Security system an additional $1 trillion short over 10 years. 

THREE OPTIONS. Backers of the Bush plan argue that, eventually, those accounts will generate far greater retirement resources than the current system. But it will take decades for that to happen. What happens in the interim? 

There are only three options. The first is to cut that basic benefit by raising the retirement age or making other changes. Whatever the policy merits of such a step, this is a politically unpopular move and unlikely to be embraced by Congress without considerable prodding. 

The second option is to borrow the money. But after working down the public debt, it will be very tough for the White House to convince the public to take on trillions of dollars in new obligations, especially after approving a tax cut that liberals will decry as having been a boon to the rich. Economically, there is no difference between the government borrowing through the general fund or through the Social Security trust fund. They are identical claims on future resources. But politically, it's a very different story. 

CASH CRUNCH. That leaves the third choice. Use general-fund surpluses. Coming into this year, forecasters figured there would be nearly $3 trillion available. But it is now nearly all spoken for. The biggest claim: $1.35 trillion for Bush's tax cuts. Add in a $300 billion defense initiative that Bush wants, a $300 billion Medicare drug benefit that Congress has promised, more spending on other domestic programs, and other tax cuts that are surely on the way, and the $3 trillion is gone. 

Even if Bush could convince Congress to approve his plan in the next few years, it will be the end of the decade before workers could actually set up those private accounts. Bush wants his Social Security Commission to embrace private accounts. Just one problem: The panel gets to figure out how to pay for them. And thanks to the tax cut, that job just got a lot harder.