Taking The Plunge

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t two days after the election, President George W. Bush was already teeing up the mother of all political issues, Social Security reform, declaring it a top priority for his second term. In a bold admission, Bush warned that "there are going to be costs." No other President or candidate for the office has been willing to say it so plainly and then tackle the issue head on — even though Social Security's looming insolvency has been apparent for decades. It's a daring gambit on Bush's part, and he can expect a difficult fight. But he has made it clear that he's eager to spend his newfound political capital on Social Security reform. The President sees reforming Social Security as a linchpin in reaching his broader goal of creating an "ownership society."

If he gets his way, Bush's legacy may surpass even his vision. He could literally remake politics, as Roosevelt did with his New Deal, which during the depths of the Depression created a vast web of entitlements that raised Americans' living standards and gave Democrats a lock on Congress for many decades. Bush's ownership society would embrace a new philosophy, shifting to working stiffs the responsibility for spending and investing wisely — and in the process fundamentally changing Americans' relationship with the government. They would own their own risk, essentially, with a direct stake in things like their retirement and health-care dollars. They would be able to watch benefits accrue, knowing the funds could never be snatched away as the result of a policy shift. Bush's Social Security reforms would cement this ownership society, with personal savings accounts, which would allow taxpayers to invest some portion of their Social Security taxes in exchange for reduced payouts. But as a result, Americans would no longer be able to count on a promise they have grown up with — that the next generation will take care of them in their old age.

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Not surprisingly, Bush faces daunting arguments against these reforms on multiple fronts — political, social and financial. Personal savings accounts "weaken the system because they dismantle the system," asserts Barbara Kennelly, head of the National Committee to Preserve Social Security and Medicare. "They hurt the economy. They put workers' retirement at risk." Millions of taxpayers in Britain opted into a comparable system in recent years and, amid a poor investment climate, fared worse than those who stuck with the old state-run pension system. The government ended up cutting incentives to shift into private accounts, and unscrupulous financial advisers put many workers in unsuitable investments, leading to new calls for reform and a raft of lawsuits.

Then there's the question of how Bush would pay for the new plan. The current Social Security is a pay-as-you-go system: new deposits from workers fund payments to today's retirees. Launching personal savings accounts would siphon away some of those deposits. The result: a massive near-term shortfall, which the Congressional Budget Office estimates will reach $1 trillion to $2 trillion over 20 years. With the federal budget deficit already stretched to a record $400 billion, the prospect of borrowing any more to establish personal savings accounts leaves Democrats and many economists gasping. "I can tell you they will be walking through a legislative and political minefield," says New York's Charles Rangel, ranking Democrat on the House Ways and Means Committee. Robert Matsui of California, ranking Democrat on the House Ways and Means Subcommittee on Social Security, says, "Unless they have a credible funding mechanism, their proposals don't really exist."