Fork in the Road

House Ways and Means Committee Chairman Bill Thomas, R-Calif., may well be the prickliest and most explosive lawmaker on Capitol Hill, but the White House would be well advised to listen to him on Social Security and tax reform. What Thomas may lack in social graces, he makes up for in his understanding of these issues and their politics.

In many ways, President Bush's fate on his two prime domestic objectives, overhauling Social Security and the federal tax code, is largely in his own hands. If the White House insists on siphoning off a share of Social Security taxes to fund personal accounts and recalculating cost-of-living benefits in a way that effectively reduces retirees' benefits, its proposal will be either a dead letter on Capitol Hill or one of the bigger disasters ever to hit the Republican Party. Anyone who thinks that the public would not see "recalculating benefits" as cutting benefits is smoking something illegal or is awfully naive.

On the other hand, if the White House remains flexible, keeps its ears open, finds a proposal that is both good policy and good politics, and adopts the plan as its own (remember how the White House initially fought creation of a Department of Homeland Security?), Social Security reform can turn into a Bush victory. Plenty of good ideas are being offered by people who understand the integration of policy and politics.

Whether Social Security is in a state of crisis or just has a serious problem that needs to be fixed eventually is a question of semantics that is ultimately unimportant. As Thomas noted last Sunday on Meet the Press, the more pressing problem is Medicare's financing. It would be wrong, he warned, to focus the discussion on Social Security at the expense of Medicare. Thomas urges everyone to think outside the box and to look at other future revenue streams -- not just at a very regressive payroll tax -- to finance these expensive programs.

Arguably, one way to approach Social Security's problem is to break it down and say that any solution should have two objectives. First, stabilize the system financially to ensure its future solvency. Efforts made today would be considerably less painful than if the repairs are delayed. The second objective should

be to dramatically increase the personal savings rate in this country, so that future retirees are less dependent upon Social Security and can have a more comfortable retirement. While that is obviously the intention of the president and his backers, their plan to shift to personal accounts using some of Social Security's payroll taxes isn't the only way to achieve that goal.

Take these objectives individually: Without resorting to Thomas's proposal to enact a broad-based sales or consumption tax (which might be needed for Medicare instead), simply pushing back the full retirement age another year or so would help immensely. But manual laborers might need a special exception.

Also, as Sen. Lindsey Graham, R-S.C., has proposed, the limit on earnings that can be taxed for Social Security could be raised from its current level of about $90,000 to $140,000 or more. Although many Republicans hate this option, the trade-off for them could be something that they would really like, such as dramatically liberalized and simplified individual retirement accounts.

If every American, regardless of age or income level, were allowed to salt away up to, say, $10,000 in pretax income every year, the savings rate would very likely increase significantly. Dollar-for-dollar matches for low-income workers would increase participation rates, no doubt. When simplified IRAs were unveiled in the early 1980s, long lines snaked outside firms selling IRAs on April 15, the last day to buy an IRA that could be deducted from the previous year's earnings for income-tax purposes.

These proposals would stabilize Social Security, lessen dependency on Social Security benefits, and increase the savings of millions of families, particularly if the government subsidized IRAs for the poor. The objective that conservatives seek -- allowing people to have greater financial control over their own retirement -- could be achieved with liberalized IRAs.

On Social Security, the ball is in the White House's court. And if the White House misplays it, the president's party risks losing its majorities in the House and Senate.