Obama and the End of Social Security Privatization

12/06/2008 05:12 am ET | Updated May 25, 2011

Here's a Bush nightmare you can kiss goodbye in the wake of Tuesday's election: privatization of Social Security.

Figuring to spend some of that famous political capital earned in his 2004 re-election, Bush pushed a plan to privatize the mother of all benefit programs in 2005. But he underestimated the enormous political popularity of Social Security--and it's importance as a government program. Privatization was crushed by Congressional opponents, including Republicans and powerful advocates such as AARP.

Social Security does face a serious long-term solvency problem. But it was never clear how privatization would help. At the end of the day, Bush's political capital was no match for the program's common-sense importance. Social Security benefits keep millions of seniors out of poverty; the program is completely universal; participation is automatic; and you don't get to make dumb decisions, like withdrawing your benefits early. Social Security even is indexed for inflation, which makes it completely unique as a retirement benefit.

Fast-forward to the looming solvency issue. As baby boomers are starting to retire and draw benefits, Social Security's expenses will surpass incoming revenue starting in 2017 if no changes are made. That would force the system to start relying on its trust fund, which would last only until the year 2041. Those projections have been used as a scare tactic by advocates of privatization.

But President-elect Obama made clear during the campaign that he flat-out opposes privatization of any kind, and the Democratic Congress won't go there, either. Even Republicans who might want to push privatization will have a tough time arguing for it in the wake of the financial losses people have suffered in their 401(k) accounts this year. So, what type of solution will emerge?

The options are fairly straightforward from an actuarial perspective. Ideas floated by experts include boosting the payroll taxes that fund the program, raising the maximum amount of Social Security benefits subject to tax, or gradually raising the age of full benefit eligibility (also known as Normal Retirement Age--about 66 for most boomers).

The Obama Administration isn't likely to move on Social Security anytime soon, considering the more urgent economic issues on the table. Still, the program is an important piece of the puzzle for the federal budget's longer-term health. So it could well come up for consideration over the next four years.

Obama has made clear that he opposes benefit reductions. He has called for higher payroll taxes for individuals with annual income over $250,000 to plug the gap. Still, there will be a great deal of give and take with Congress on fixing Social Security, so don't rule out the possibility that benefits could be trimmed a bit--probably on a graduated basis over time. Raising the Normal Retirement Age could be in the mix, especially if it's done gradually.

Who wants to retire, anyway?