Taking The Plunge

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The powerful AARP, a lobby for older Americans, is also lining up opposite Bush, reasoning that private accounts would only drain resources for retirees faster. The group would augment Social Security with investment incentives but sees the current debate as merely delaying a hard-nosed discussion about the program's solvency. And the battle won't necessarily play out strictly along party lines. "There will be a lot of Republican push-back" from those worried about swelling the deficit, says Republican Senator Lindsey Graham of South Carolina, who has introduced a reform bill and says he will spend the holidays working on a funding solution.

In other quarters, the call for action of some kind has grown deafening. With the oldest baby boomers set to retire in 2011, the costs of paying out Social Security benefits will soon swamp tax revenue flowing into the system. As things stand, in 2018 Social Security will start paying out more than it collects, and it will exhaust a $2.3 trillion surplus by 2042. The costs from there only steepen. Economists note that the surplus exists only as a book entry on the government's balance sheet. The reality is that the money has been spent on other programs. To replace the surplus would require more borrowing. Many argue that the only way to fund the future shortfall is by raising the retirement age, cutting benefits or increasing taxes — measures that Bush has ruled out.

Peter Peterson, a former Commerce Secretary turned author and banker, calls the mess "a significant moral issue" because Social Security costs pose "a hidden tax increase on our children and grandchildren." In a speech last August, Federal Reserve Chairman Alan Greenspan pleaded for honest bookkeeping, saying, "As a nation, we owe it to our retirees to promise only the benefits that can be delivered." Jeffrey Immelt, CEO of GE, told TIME that people who oppose change are "sticking their head in the ground." He has no position on personal savings accounts but thinks something must be done. "There are new dimensions to health care," Immelt said. "This program was designed some 70 years ago. The odds of their having gotten it right for 70 years are almost zero."

Bush has in hand a 2001 blue-ribbon President's commission report that concluded that personal accounts can work as part of a long-term fix. The commission's work is expected to be the starting point for reform discussions. A member of the commission, Robert Pozen, CEO of mutual-fund firm MFS Investment Management, says he believes future benefits must be cut to fix the system. He endorses personal savings accounts as "the sugar to get people to accept some slowdown in the growth of benefits." So far, advocates of reform have promised that people near or at retirement age will not be affected by personal savings accounts. Whether the program will be voluntary for others is open to debate.

Personal savings accounts emerged as a Social Security component in academia as far back as the 1950s, but the idea remained dormant until the 1980s, when Ronald Reagan ignited a Republican revolution and the recently formed libertarian think tank the Cato Institute latched onto personal accounts as a free-market fix. Retirement savings, in the free marketeers' view, should be seen as dynamic investments rather than welfare-state safety nets. Indeed, the Cato economists and others concluded that Social Security just wasn't a good investment, based on what taxpayers put in and what they ultimately get out. The President's commission underscored that point, noting that the typical man born in 2000 could expect his Social Security benefits, after inflation, on average to equal less than the 1% annual return on the taxes he paid into the system over his life.