What Bush Isn't Telling You About Social Security
By Penelope Wang

(MONEY Magazine) – Never count George Bush out. When he hits a roadblock, he will often overcome it with sheer persistence. No, we don't mean the capture of Saddam Hussein. We're talking about privatizing Social Security.

That's the motive behind Bush's resurrection of his earlier proposals for new tax-free savings plans for retirement and other big goals. The plans, buried in the budget that Bush proposed in early February, would let investors of any income annually sock away after-tax dollars that could grow tax-free. Money in a Lifetime Savings Account (LSA) could be withdrawn at any time for any purpose: college, a home, even a new car. The Retirement Savings Account (RSA) would be, essentially, an expanded Roth IRA.

Last year the White House quickly dropped the savings proposals amid fierce opposition. This time, Bush is soft-pedaling the plans--he failed to mention them in his latest State of the Union speech--but renewing his call for Social Security privatization. "Younger workers should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account," Bush said in his address. "We should make the Social Security system a source of ownership for the American people."

Of course, no President, Democrat or Republican, has successfully tackled the touchy subject of overhauling Social Security--and it's certainly not going to happen in an election year. For now, the administration is focusing on more immediate economic goals (see the box at right), but the fact that the RSA and LSA made it into the budget is instructive. "Bush is really setting things up for 2005," says Brian Graff of the American Society of Pension Actuaries.

The tax-free savings accounts are, in many ways, a Trojan horse for Social Security. As Daniel Clifton of the American Shareholders Association, a Washington, D.C. group that favors the plans, notes, "The increased private saving will help the transition toward personal Social Security investment accounts."

Is this sneaky politics? Perhaps. But it also may be political prudence. After all, none of Bush's leading Democratic challengers are offering any dramatic Social Security initiatives either.

By putting the RSA and LSA back into play (however softly), Bush is framing the Social Security debate on his terms--to privatize or not to privatize. That strategy helps obscure an inconvenient fact: Privatization alone won't fix the looming Social Security deficit. With the first wave of baby boomers retiring four years from now, the costs of the Social Security system are expected to exceed its tax income starting in 2018; at that point, the system would start tapping its trust funds, exhausting them by 2042. Dealing with that shortfall means painful choices involving reduced benefits and higher taxes--and the longer we wait, the higher the costs. It's not something you're likely to hear from any politician, including President Bush, anytime soon. Well, maybe President Jenna Bush. --PENELOPE WANG