Feb. 14 issue - You've got to give President Bush an A-plus for the way he marketed the Social Security proposals in his State of the Union address last week. "If you've got children in their 20s, as some of us do, the idea of Social Security collapsing before they retire does not seem like a small matter," he saida sentiment with which even a skeptic like me, who has twenty- and thirtysomething kids, totally agrees. "We must ensure that lower-income Americans get the help they need to have dignity and peace of mind in their retirement," he added. Then, with a twinkle in his eye, he talked about making Social Security "a better deal" for younger workersa clever allusion to the New Deal of Franklin Delano Roosevelt, father of Social Security. You could almost feel the Democrats gnashing their teeth.

You can't argue with Bush's stated goals of making Social Security financially sound to allow Americans a secure retirement. "I will listen to anyone who has a good idea to offer," he said. But the conditions he laid down in the rest of the speechdemanding private accounts and no new payroll taxesindicate that his mind's pretty much closed. For obvious reasons, he quickly skimmed over the sacrifices required to make any new system work, attributing the ideas to Democrats, such as former senator John Breaux. But in fact, so many details of Bush's plan have emerged that we can use some back-of-the-envelope math to see if they make sense. The short answer is that many of them don'tand I'll show you why. Don't worry, my envelope's bipartisan: there's plenty the Democrats aren't telling you, either. Bush is pretending Social Security's about to collapse and go broke, which isn't true. The Dems are telling you that it can continue as is for more than 30 years without a problemand that's not true, either.

Yes, I know that by now, you're loaded to the eyeballs with Social Security analyses. You've seen so many numbers your teeth hurt and your brain has reached statistical overload. Please bear with me. Based on my decade of deep-diving into Social Security's workings, I'll filter out the political junk, spare you all but the essential numbers and stick to economics.

Let me start by saying it would be great if Bush's (seriously flawed) proposals lead to a reasonable compromise to adapt Social Security to the 21st century. Bush would be a statesman for the ages. Hey, I don't have a knee-jerk bias against private Social Security accounts. I'm all in favor of them, properly structured. But Bush's aren't.

Now to the details. The Bush proposals are based on something called Plan 2 that was proffered as a solution to Social Security's woes by a commission Bush set up in 2001. A Wednesday press briefing by Chuck Blahous, the White House's Social Security point man who was executive director of the commission, makes it clear the Bushies are proposing Plan 2, with a few modifications.

The current system is clearly unsustainable, despite what Democrats say about it being sound until the 2040s. Today's workers support current Social Security retirees, and the next generation is supposed to support them. The ratio of workers to recipients has fallen from 16-1 to the current 3-1, and will fall to a future 2-1. Keeping the current system afloat would require some combination of cutbacks in future benefits, more money from workers or taxpayers, or both. Given that Bush doesn't want to increase taxes, all that's leftif he prevailsis benefit cutbacks. And Plan 2 has serious cutbacks. An average worker retiring in 2075, for instance, would get a benefit 46 percent below the current formula. Later cuts would be even deeper. The plan does this by using a benefit formula based on inflation rather than on wages, which are roughly 1 percent a year higher. A few decades of compounding 1 percents sure adds up.

The one tax on income that Bush hasn't cut as president is the Social Security wage tax, which costs 80 percent of American workers more than federal income tax does. By keeping the tax the same and reducing future benefits, Bush is like a candymaker that cuts 46 percent off a chocolate bar but charges the same 75 cents for it. In other words, his plan would effectively increase the Social Security tax. Sure, the current formula's unsustainablebut, as we'll see, there are other ways to fix things.

Now, watch this. Bush's private accounts don't make Social Security financially soundthe benefit cuts do. The private accounts are something Bush insists on, not something Social Security needs to regain its long-term financial footing.

Shifting to private accounts, under Bush's plan, would lead to massive borrowing by the federal government, adding to our already huge deficits. Under the current system, your Social Security taxes go to pay Ma and Pa and Grandma and Grandpa, plus disabled people and survivors. If your money is going into a private account instead, how will Uncle Sam pay Ma and Pa? The same way Bush has paid for everything, be it tax cuts, wars or his Medicare prescription-drug benefit: borrowing.

In the first 10 years of private accounts, according to the Center on Budget and Policy Priorities, a Washington think tank, the government would have to borrow $1.3 trillion (including interest) to make up for wage taxes no longer available to pay Social Security benefits. (This assumes two thirds of eligible workers opt for the accounts.) Over the first 20 years, borrowings would total $4.5 trillion. This is serious jack. The Bushies like to compare these borrowings with what they claim is a $10.4 trillion gap between Social Security's obligations and the resources available to pay them. But the shortfalllet's not quibble about its sizewould be eliminated by cutting the benefit formula. We'd be borrowing trillions to cover bets in the stock and bond markets for a system with "security" in its name. Given that foreigners are financing almost all our budget deficit, we'd be hocking ourselves even more to lenderssuch as the central banks of Japan and Chinawhose long-term interests may not be the same as ours. I think that would be a terribly serious mistake for us to make.

This brings us to the Democrats, who keep clinging to the idea that Social Security's accumulated surplusesknown as the "trust fund"will protect benefits under the current system until 2042. Plenty of people share that opinion. But they're wrong. Let me show you why, unless we change things, Social Security will become an incredible cash drain on the rest of the government a decade or two down the road. My analysis, incidentally, is the same as Chuck Blahous'sand we've arrived at it totally independently.

Look at the chart on page 42 of the magazine. You see that Social Security is now taking in more cash than it spends. The accumulated surplus is approaching $2 trillion. But there's a big problem here, fans. The money isn't being saved. Instead, one part of the government, the Treasury, is writing IOUs to another part, Social Security. The Treasury borrows Social Security's surplus cash and gives it IOUs in return. It pays interest on the trust fund's IOUs with additional IOUs rather than cash. So you've got a big pile of government promises to itself. Nothing's been saved. It's as if you wrote IOUs to yourself, stuck them in a coffee can and called them savings. When you needed cash, you'd reach into the can, but all you'd find are IOUs. You'd have to bring in more money or spend less or borrowjust as if there were nothing in the can but coffee.

OK, let's fast-forward to 2018, when Social Security is projected to take in $23 billion less cash than it spends. By then, the trust fund would have more than $5 trillion of Treasury IOUs in it. So it would be a piece of cake to cover a crummy $23 billion, right? Wrong. No matter how many Treasury securities the trust fund has, Treasury would still need $23 billion of cash to cover Social Security's bills. The Treasury can trim other expenses, bring in more money or borrow 23 billion bucks. But these options are exactly the same as they'd be if there were no Social Security trust fund. By 2027, Social Security would be taking in almost $400 billion less than it spends, requiring huge cash influxes. The trust fundon paperwould still be getting bigger. In the real world, though, Social Security's cash deficit would be seriously squeezing the rest of the government. Finally, as the cash deficit nears half a trillion dollars annually, the trust fund starts to shrink, then melts away. But the fund's irrelevant, folks. It's an accounting entry, not real money. How the Democrats can cling to the trust fund with a straight face is beyond me. Maybe it's because they don't want to shatter Social Security's myths, or let people see how expensive Social Security really is.

Now, look. These numbers show there's a problem if something doesn't change. But it's no crisis. If you want a crisis, look at the totally unfunded Medicare prescription-drug program that Bush shoved down Congress's throat in 2003. The same people who calculate that Social Security has a $10.4 trillion shortfall place the drug program's at $17 trillion. Social Security can cover its own expenses for a dozen years. The drug programwhich isn't even good insurance, being riddled with coverage holes and assorted problemsstarts chewing through money next year. Which is the bigger problem? Hint: not Social Security.

Now it's time to look at how Bush's private Social Security accounts would work. And who'd win and lose. Under Plan 2 in its current incarnation, you'd almost certainly want to sign up for these accounts if you're younger than 55. Yes, you'd have to accept a smaller guaranteed benefit. But you'd come out ahead if your account produced an annual returncash income and price gainsof more than 3 percent above inflation. That's not a slam-dunk, but it ought to be attainable because you would have a choice among a handful of high-grade, very-low-cost, very diversified mutual funds. But there's a catch. You would own the account, sort of, but you wouldn't control it. And you'd have to fork over the aforementioned 3 percent returnby taking a smaller benefitwhen you cash in your account.

Bush, brilliantly, is marketing these accounts as empowering people who'd have no other assets. But I don't think things would work out well for these folks. There would be strict limitations on the accountsyou couldn't take money out of them before you retire, or even borrow against them. And the odds of a low-income person's being able to leave a significant account to her heirsone of Bush's major selling pointsstrike me as remote.

Here's why. When it's retirement time, low-income people would likely have to convert most or all of their private account into an annuity to have enough money to live on, or to meet requirements that their guaranteed benefit plus annuity income would exceed certain levels. If you had to convert your entire account into an annuity, there would be nothing left for your heirs when you died. Higher-paid people, by definition, would have bigger private Social Security accounts and less need for annuity income than lower-income people would. This gives them a far greater chance of having something left to hand down to their heirs, and gives lower-paid people less chance. Not to be snotty, but we higher-income types hardly need additional breaks. We've already got plenty.

Staying power matters big time, tooand higher-income people have more of it than lower-income people do. Although stocks tend to rise over the long term, you'd have to cash in some or all of your retirement account to buy an annuity when you retire. That puts you at the mercy of events. Consider the following, produced at my request by the Center on Budget and Policy Priorities. Say you retired in March of 2000, with a private account that held $100,000 of stock in an SP 500 Index fund. (Index funds match the performance of a benchmark; they don't try to beat the market.) Your inflation-adjusted annuity would have been $7,558 a yearabout $630 a monthby the center's calculation. But if you had the same number of shares in your account and instead retired in October of 2002, your account would have had less than $60,000 in it. Your annuity: $3,352 a year, or $279 a month. The combination of lower values and lower interest rates is a double whammy. You see the problem? You can get much lessor much morethan someone who's saved at the same rate as you, but retired a little earlier or later.

If you've got financial staying power, you could wait for better days, or buy the smallest annuity the government will permit. If you don't have staying power, you have to take what the market gives you. Higher-paid people thus have a big advantage. The guaranteed Social Security benefit, by contrast, is tilted toward lower-income people, with a benefit of about 56 percent of Social Security-covered wages for a minimum-wage earner, 30 percent for folks like me who've reached the Social Security maximum every year. You're swapping benefits skewed toward lower-income people for investment opportunities skewed toward higher-income people.

I'm in favor of private accounts constructed along the lines that Bush suggested. But the accounts ought to be in addition to the basic benefit, not as a replacement for about half of it. Democrats are crazy to oppose private accounts. They really do empower you. The current generation is used to investing, and is understandably skeptical about government promises. This isn't the 1930s, when only a handful of people bought stocks, and many of them came to regret it. It's the oughts, guys, get with it. FDR's been dead for 60 years. The world has changed.

If the president really wants to fix Social Security rather than pick a political fightand the Democrats feel the sameit wouldn't be difficult. They'd compromise by putting more money into the system by raising wage taxes a tad, taking less out by increasing the retirement age and trimming benefit formulas and setting up private accounts funded by wage earners, not by government borrowings. Put a few willing negotiators in a room and a deal's done in a month. I won't hold my breath, though.

Bush has marketed the pants off the Democrats by setting the terms of debate. Do you want to pay higher taxes or lower taxes? Clearly, lower. Do you want to pay estate tax or not? Do you want private accounts, or don't you? He's done a fabulous job of showing the goodiesand of hiding the costs. People, naturally, have opted for the goodies. The Bushies are in full sales mode, including sticking recordings on Social Security's phone lines preaching that the system has to change. In the name of empowering my kids, he's asking them to pay full freight for my retirement and for trillions in new borrowings, while forking over the same wage taxes for lower benefits. If he can sell this one, the Marketing Hall of Fame should start planning his induction ceremony.