Sunday, February 20, 2005

Social Security and the Young, or Beware the Great Deceiver

Every day we hear of another poll showing limited support for George Bush's social security proposals, and more Republicans who are having second thoughts.

Despite this, Democrats should not be certain of a political victory, and need to act now to maintain the support of one group--the young. While polls show most opposing Bush, a Wall Street Journal/NBC poll shows that those under 35 support private accounts by 51% to 43%. This is an important demographic which Kerry won, and the Democrats need to keep in order to swing the pendulum back in their direction long term.

Part of this is due support among the young is due to the mistaken belief that Social Security won't be around when they retire. I fear that the current campaign cry of There Is No Crisis may be a mistake. While the crisis has been exaggerated, and while Bush's plan does nothing to help the problem, there is a legitimate concern that the retirement of the baby boomers will cause problems for the system. The message needs to be not that Democrats deny the existence of a problem, but that this is a fixable problem.

The young also are more likely to support private accounts because they realize that, with the time value of money, it is possible that they may do better. They need to realize a few points here:
  • Bush's plan adds trillions to the deficit, which undermines the long term value of their investments

  • Social Security is not just a retirement program. It is also a disability insurance plan. If they want to compare future income from Social Security to potential income from retirement plans, they most include the value of this disability insurance in their calculations, as well as the value of payments to survivors.

  • Social Security is forever. Private investment accounts will run out of money eventually unless someone can afford to live off them without touching the principal. Social Securitiy will not run out in this manner. Payments continue as long as they live, and are even indexed for inflation. While private investment accounts are a good idea, there is value to also having a Social Security plan with a guaranteed income regardless of how long they live. If they live long enough, and the young believe they wil live forever, the returns from Social Security can even exceed the returns from an investment account.
My fear is that Bush, learning his present proposals are dead, will change them to something which can pass. We've seen Bush go for the political win several times in the past. For example, when even Republicans balked at his plans to use the prescription drug plan to force seniors into HMO's, Bush backed down on this, but still made sure he had a plan. When the politicis were against him, he backtacked on his opposition to the creation of the Department of Homeland Security.

My bet is that Bush will do whatever it takes to have a Social Security plan pass Congress. When he is forced to give up on his current plan, I would not be surprised if he borrows Clinton's idea of having retirment accounts added on to the current system.

Democrats must make sure that Bush does not become a hero among the young by stealing Clinton's idea. I would suggest that they take the initiative now of proposing a real solution to the long term problems of Social Security, and include a voluntary add-on program of private tax deferred retirement accounts.


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