Social Security ambuscade

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Give the devil his due, Sen. Ted Kennedy is one helluva good politician -- one of the best. Mr. Kennedy practices his craft in the same manner and style as the late Sen. Daniel Patrick Moynihan. He lures his philosophical opponents with his bonhomie into believing they can "work together." He seals the deal by making what appear to be strategic concessions to his opponents that in fact turn out to be decoys baiting a carefully laid trap.

Mr. Kennedy first played this trick on President George W. Bush back in 2001 when the president was seeking to increase parental choice in education. Mr. Kennedy convinced the president his compromise bill would lead to greater parental choice in education but instead it produced a greater federal role in education and vastly diminished choice for parents.

Now, he's doing it again on Medicare. While forcing an expensive new prescription-drug entitlement into the Senate Medicare bill, Mr. Kennedy also conceded just enough Medicare "reform" to give the appearance Medicare was eventually going to be transformed into a market-based insurance program driven by the private choices of Medicare recipients. The Bush administration took the bait.

Administration officials convinced themselves that if the Senate bill becomes law, 48 percent of Medicare recipients would voluntarily leave Medicare and sign up for private insurance. They believe more and more senior citizens eventually will choose the private-insurance option provided for in the bill, and thus Medicare as we know it gradually will fade away.

The Republicans think they are playing an old Washington strategy called "getting the camel's nose under the tent." You get the camel's nose inside the tent today and pull his whole body in tomorrow. The problem is Mr. Kennedy is a master legislator who has used the same strategy many times himself, and he knows how to defeat it. If Republicans had bothered to go outside the tent, they would have noticed Mr. Kennedy had staked that camel down by its tail and all four feet so it never could be pulled all the way into the tent.

Mr. Kennedy was forthright that the bill would preserve Medicare as we know it, warts and all, and even crowed about it on the Senate floor. "If you think Medicare should be privatized," Mr. Kennedy said, "then you should oppose this bill."

Mr. Kennedy's performance on Medicare is instructive on how to avoid falling into the same trap on Social Security next year. I call the trap "Moynihan's trap" because it was Moynihan who baited and laid the trap shortly before he died when he served as the co-chair of President Bush's Social Security Commission.

What's disconcerting is that most of those members of the Bush administration who were associated with the commission already bit at the bait before Moynihan departed. The trap's bait consisted of small personal retirement accounts consisting of 2 percentage points of the 12.4 percent of worker's income currently collected in Social Security payroll taxes. The trap's jaws are the solvency condition Moynihan convinced the commission to accept: "Don't talk about privatized accounts until you first make the system solvent."

The only way to "make the system solvent" without talking about personal accounts, however, is to raise taxes and/or cut benefits, which is why Moynihan advocated gradually raising the payroll tax to 13.4 percent and thereafter adjusting payroll tax rates so annual revenues from taxes closely match annual outlays. In other words, he wanted to rig the system to produce automatic tax increases in the future to keep it "solvent."

Moynihan's strategy, which he foisted on the commission and its administration minions, was to neutralize and co-opt advocates of personal retirement accounts with a small dose of privatization in order to maintain Social Security as we know it -- an enormous pay-as-you-go, tax-and-transfer intergenerational redistribution program.

Small accounts (the "camel's nose") were intended to pacify advocates of personal accounts and to divert attention from the comprehensive set of tax increases and benefit-payment reductions that would stake payroll-tax revenues firmly in place, like Gulliver on the beach, to prevent any more of the payroll tax from ever being pulled into the personal accounts.

A recent internal memo from the Social Security Administration reveals just how thoroughly ensnared in Moynihan's trap the administration has become:

"Proposals such as those from the president's commission reduce scheduled benefits in two ways: first, through solvency measures ... that bring the program back to solvency and apply to all individuals; and second, through personal account benefit offsets that reduce traditional benefits for individuals opting for an account."

President Bush should apply two tests to Social Security reforms urged upon him by his staff. First, would every worker in America be allowed to devote a substantial portion (5 to 6 percentage points) of his payroll taxes to a personal retirement account, today, not sometime in the future? Second, would the government guarantee every worker that under the reformed system his retirement income would not be a penny less than promised under the current Social Security program, and does all of the money necessary to make good on that guarantee come from issuing bonds, not raising taxes?

If the answer to both of those questions is not an unambiguous, unqualified "yes," the president should not take the bait or he will get caught in Moynihan's trap.

Lawrence Hunter is the chief economist at Empower America.