TIME TO GRAB THE THIRD RAIL

...At the beginning, the payroll tax rate was 2 percent on the first $3,000 of wages...

...And indeed, the Kennedy solution would require a great deal of courage...

...Right now, every dollar of income above $68,400 is free of payroll tax...

...Even adjusting for inflation, that's close to a 1,500 percent tax increase over 60 years...

...Which is why mainstream Democrats are becoming interested in a third solution: a plan devised by former Social Security commissioner Robert Ball that keeps the contribution and benefit scheme more or less as it is now, and tries to save Social Security by investing its funds in the stock market in the hope of earning extra cash...

...And if Social Security intends to invest any considerable amount of money now, it will need to sell off a huge batch of the Treasury bonds in the trust funds—possibly triggering a rise in interest rates, a recession, and a collapse in the very stock market in which it plans to invest...

...The American public hungers for Social Security reform about as much as one of Trollope's gouty squires hungered for reform of the House of Lords...

...One more thing...

...Because the system's deficit will be huge, the tax increases and benefit cuts will have to be equally huge—a payroll tax that will ultimately reach 18 percent, a tax that when combined with President Clinton's 39.6 percent top income-tax rate would bring back the 50 percent tax rates of the 1970s for higher-earners, and finally spending cuts that will end by virtually eliminating Social Security benefits to senior citizens who saved for their own retirement...

...Much less, choose one...

...Moderate Democrats like Sen...

...There is no appetite for change, and no trust in the politicians who will have to effect that change...

...It's dazing, it's daunting...

...government owes another branch is nothing but a bookkeeping notation...

...One could raise the payroll tax even more, either by hiking the rates or by broadening the tax base...

...The $3 trillion that one branch of the U.S...

...Proposal after proposal...

...Plan after plan...

...That's the sort of spending cut Republicans can only fantasize about imposing on, say, the Department of Energy...

...AND AS SCARY AS PRIVATIZATION IS FOR REPUBLICANS, THE OTHER THREE ARE WORSE...

...Today's Republican Congress resembles that cat—so scalded by entitlement reform in the past that it is terrified of any bold measure...

...Where they differ is in how rapidly they make the transition from the present system, and in how firm a floor they put under people whose private pension investments turn sour...

...But no matter how reliable you are, you cannot make yourself richer by writing yourself checks...

...The gap between what the tax will bring in and what the system requires is enormous: Nobody can say for sure how enormous, but even the most optimistic projections reckon that the shortfall will be in the hundreds of billions of dollars...

...benefits the federal government has promised...

...Phil Gramm has introduced a plan that makes the transition with remarkable care, giving every retiree the choice of the pension promised by Social Security or an independent retirement account, requiring no new taxes or new borrowing, and making the transition from the old system to the new over the next 50 years...

...Under the circumstances, then, it might seem recklessly bold for anyone to propose a radical, freemarket transformation of Social Security...

...If you are generally a reliable person, and you write me a check for $100, then I'm entitled to think myself $100 richer...

...government will have to go find some new money if it is to honor its promises...

...But the Republican party needs to steel itself now to the truth: The only alternatives to privatization— doing nothing, hiking taxes and slashing benefits, nationalizing American industry—are far riskier in both economic and political terms...

...TIME TO GRAB THE THIRD RAIL The Political Case for Privatizing Social Security Now By David Frum These days, a Washington journalist who evinces an interest in Social Security is likely to find himself in the same predicament as someone who buys from a mail-order catalogue: 72 hours later, the Post Office will need a forklift to deliver all the bales of printed matter to his doorstep...

...But a couple of skeptical observations are in order...

...Sounds good...

...For all the seeming abundance of plans to reform Social Security, there are really only four possible types of solution...

...What they all have in common is that pensions are based on real assets, not a promise by government to tax future taxpayers, they deliver better returns than Social Security, and they are owned by the citizen rather than being controlled by the government...

...Soon there will be only two...

...Again, that much everybody knows...

...Put into practice, the Ball plan would have the government buy up to 20 percent of all the shares listed on the New York Stock Exchange, making it the largest single stockholder in the country...

...But politics is like the bumper-cars at amusement parks: It's a delusion to think that, by refusing to move, you can protect yourself from being hit...

...Maybe something similar could happen with Social Security...

...And appended to each, a phone book's worth of numbers...

...If that money had flowed into the stock market instead of the fisc, last year's tiny federal deficit would have grown by $44 billion...

...Those who advocate standing pat point out that while revenues from the payroll tax will begin to fail to keep pace with Social Security spending a dozen years from now, that doesn't mean immediate bankruptcy: The system has plenty of money in the bank...

...Now, in principle, one could go farther still...

...What remains, then, is privatization: The government requires everyone to save a minimum amount in tax-sheltered accounts, regulates those accounts to protect unsophisticated investors, and guarantees everyone a certain minimum pension regardless of how his investments turn out...

...In fact, by the time the baby boomers begin retiring, it will have almost $3 trillion, all of it in U.S...

...When the system was established in 1937, there were 42 workers for every beneficiary...

...This reduction of the Social Security benefits of upper-income seniors also has a political constituency: It has long been seen as a badge of political courage by neo-liberals at places like the Progressive Policy Institute and the New Republic...

...In 1995, the Republicans got walloped by President Clinton for proposing a few-bucks-a-month increase in the Medicare premium...

...Democratic stalwarts Moynihan and Bob Kerrey have written a potential compromise plan that would put a modest 2 percent of payrolls into individual accounts...

...Everyone knows that the condition of Social Security is desperate...

...That $3 trillion in the trust funds could be $30 trillion or $300 trillion or some other equally incalculable number...

...A system created for an America in which most people died soon after reaching 65 is breaking down in an America in which life expectancies approach 80 and the average woman gives birth to only two children...

...Even recipients will lose their enthusiasm for it as it comes to look more and more like welfare...

...And at the same time, we could go on slashing benefits, particularly for the more affluent elderly, directing Social Security funds to those elderly who need them most...

...solemnly promising to find the revenue for Social Security when it was needed...

...Who knows...

...In 1996, Steve Forbes offered a much more radical plan that would complete the transition faster, offer retirees more benefits, but also require the federal government to borrow more in order to finance it...

...Without Social Security reform, we are 12 years away from a financial emergency more expensive than World War II...

...Now there are three...

...This is, as it happens, the course the federal government has been pursuing since Social Security was unveiled...

...Different politicians will make different choices...

...Sometime after 2010, the money raised by the Social Security payroll tax will no longer suffice to pay the David Frum is a contributing editor to THE WEEKLY STANDARD...

...Franklin Roosevelt knew what he was doing back in 1937...

...Treasury bills...

...Daniel Patrick Moynihan understand that a more brazenly redistributive Social Security program is, sooner or later, a crippled Social Security program, and they will fight—as they have consistently fought—to save the program's popularity by maintaining its universality...

...State ownership of the means of production is likely to seem to many Americans a rather high price to pay to save Social Security as we know it...

...It does not alter the harsh arithmetic fact that on that day 12 years from now in 2010 when the payroll tax falls short, the U.S...

...Professors Jerry Mashaw and Theodore Marmor of Yale argue that the Ball plan would "allow pensioners to capture the higher returns of financial markets, while keeping the risk collectively shared rather than individually borne...

...The tax-and-slash approach to Social Security will split the Democratic party...

...That's the labled Social Security "trust funds," and the crisis can be avoided for 20 years simply by spending it...

...Edward Kennedy has proposed extending the payroll tax to all income...

...Very gratifying to the liberal mind...

...In 1984 and again in 1993, the government began taking back through the tax code up to one-third of the Social Security benefits of the most affluent seniors...

...The payroll tax in 1997 raised some $44 billion beyond the amount needed to pay for current benefits...

...Your Social Security check was not charity: You had paid for it, and you were therefore entitled to it...

...Sen...

...Today it is 12.4 percent on the first $68,400 of wages...

...Whether you accept this argument depends on whether you believe that the Social Security trust funds actually exist...

...And as scary as privatization is for Republicans, the other three solutions are even worse...

...That's not all...

...But if more and more of Social Security's costs are paid by higher-income people and its benefits are more and more tightly concentrated on lower-income people, its constituency will inevitably shrink...

...The voters brutalized the Republicans in 1982, when the GOP considered stiffening the rules governing early retirement, and they punished the Democrats even more harshly in 1994, after Bill Clinton's budget deal taxed a big chunk of the Social Security income of the better-off elderly...

...That brings us to solution two, the favorite of liberal Democrats: Why not rejigger the benefit formulas, they ask—raise taxes a bit, cut benefits a little—so as to stave off the crisis of 2010...

...In other words, doing nothing is an invitation to catastrophe...

...All it means is that over a long period of years the payroll tax raised more than the Social Security Administration spent, and that the surplus was placed in the Treasury...

...While it's arithmetically possible to save Social Security for the least-well-off by cutting the benefits for everyone else, it's also true that it is the universality of Social Security that has endowed it with such fantastic political strength...

...There are dozens of versions of privatized plans...

...Mark Twain once quipped that a cat that sits on a hot stove will never again sit on any stove, hot or cold...

...The Treasury in turn spent that surplus on other things—aircraft carriers, national parks, Bill Clinton's legal team—while THERE ARE REALLY ONLY FOUR POSSIBLE SOLUTIONS...

...And the answer is, because there is no better choice...

...Who can possibly hope to understand all these alternatives...

...But they also know the immense political risk of attempting to solve the problem...

...Wouldn't that be the same as putting the bullets into the gun, putting the gun into the Democrats' hand, and saying, "Shoot us...

...He wanted to cleanse his program of any taint of mendicancy, to convince the American people that their payroll taxes were a form of contribution to a universal annuity...

...Sure, most of us would feel pretty flush if we had $3 trillion of Treasury notes in our bank accounts...

...Why on earth even tinker with the single most popular program in the vast federal repertoire, the famously dangerous third rail of American politics...

...Solution one is to do nothing, wait, and hope that something will turn up...

...Republicans who worry about the political risks of privatization can cheer themselves by contemplating the truly colossal political risks of saving Social Security by raising taxes and slashing benefits...

...While the Ball plan seeks to capture higher returns for the Social Security system, it will incidentally capture something else too: control of the American economy...

...If that was too much for the American public, how can Republicans be expected to stake themselves to the cause of Social Security privatization...

...The energy crisis went away on its own, so did the acid-rain problem, and so probably will global warming...