The free-market wing of the Republican party is outraged at President Bush and his performance at the press conference on Social Security Thursday night.

After all, instead of insisting on converting the government programme to a system of private individual accounts, the president merely talked about giving younger workers the option to shift some of their cash into such accounts. Even more infuriating, at least to the fire-breathers, is that the president allowed that he might alter the benefits formula so that higher earners would receive smaller pensions than they are currently scheduled to receive (on paper). A typical response came from Larry Hunter speaking for the Institute of Policy Innovation in Mr Bush’s own Texas: “I am disappointed that President George W. Bush tonight proposed cutting promised future Social Security benefits. Cutting promised future benefits is unnecessary, could be politically explosive and might, I fear, undermine efforts to make Social Security permanently solvent by allowing workers the choice to save a portion of their Social Security contributions into personal retirement accounts.”

My own view is: cheer up, Larry. When you actually parse the text of the president’s remarks, it becomes clear that Mr Bush did three things on Thursday that market-oriented types should be thrilled about. The first is that he backed private accounts at all. Though this endorsement from him is not new, it is important to remember that in taking this step Mr Bush is going farther than both his father and Ronald Reagan went before him. ( An entire volume of Reagan’s letters reminds us that the man who saved Eastern Europe and faced down Mikhail Gorbachev dared not touch Social Security; in the letters he limits his comments to remarking that “actuarial imbalance” caused a problem.*)

The second great thing that the Mr Bush did was promise not to lift the social security “cap”. Currently Americans pay Social Security taxes on the first $90,000 or so that they earn; their employers contribute an equal share on that same $90,000. Republicans - most notably Lindsey Graham of South Carolina - have suggested that that limit be abandoned. Some have even suggested subjecting every dollar of earned income to the payroll tax. The White House for its part flirtatiously and repeatedly represented in recent months that it was “open” to the possibility of cap lifting. Such a suggestion might have lured Democratic interlocutors (the hope). But written into law, it would have represented a marginal tax increase of - when you include the employer side - well over ten percent, more than offsetting all the fine work that Tax-Cutting George has achieved since he took office. It was good to see Mr Bush reject that option Thursday.

Mr Bush’s third achievement - though you would never know it from the press - is his promise to sustain the same real benefits that workers get today in pensions for future retirees. Under the current system, each successive cohort of workers receives a higher real pension than its older brothers and sisters in preceding cohorts. The reason for this is that the base formula for Social Security is pegged to increases in the real wage. In other words pensions increase not just for inflation but also beyond that. All Mr Bush suggested was to limit the increases in future pensions so that those increased compensated for inflation alone. And he even exempted lower workers from the change.

Those who are “outraged” about this finally suggestion - mostly people on the left, this time - are being disingenuous. If there were money in the system to fund scheduled benefits, Mr Bush would indeed be suggesting “cuts” to those benefits. But there is no money in the system. You cannot cut what is not there in the first place. All Mr Bush was doing was telling a truth most politicians don’t dare to tell.about Social Security.

Of course the president could have gone farther. He could have suggested that the US convert to private accounts right away, and fund the conversion by reducing government spending in other areas. There is even legislation out there that would achieve such a thing - the Ryan-Sununu Social Security proposal. His proposals in toto however constitute a great deal for both the working class and entrepreneurs. Indeed, in their right minds entrepreneurs should be willing to trade changes to benefits far worse than any he suggested for a promise not to raise taxes. Onward, George.

*”Reagan: A Life in Letters” Smith, Kiron, et al., eds.

amity.shlaes@ft.com

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