George W. Bush's decision to make partial Social Security privatization a major part of his presidential bid could be the most important policy initiative in this or any other presidential campaign in the past two decades. When José Piñera and I met with Governor Bush in Austin several years ago to discuss this issue, he seemed genuinely convinced that it was an important thing to do but uncertain about the political practicalities of such a proposal. Well, he's about to find out.
Historically, Democrats have loved to demagogue Republicans on Social Security—to the point that the GOP became a cheerleader for what is essentially a socialized retirement system. Times change. Today, more than half of all Americans own stocks. Internet access to financial data and advice has made most of them too sophisticated to be scared by "risky investment scheme" mantras. Still, the conventional wisdom inside the Beltway remains that Social Security is the Third Rail of American politics and should not be touched. Most Republicans running for Congress would probably just as soon see Bush stay away from the issue. Democrats, smelling blood, are already on the attack.
Vice President Gore asserts that Social Security privatization represents a "survival of the fittest" mindset and that it is "an ideologically driven scheme that is bad for families and bad for the economy." New Jersey Democratic Senate hopeful Jim Florio admonishes, "Social Security is a guarantee, not a gamble." With a curious turn of phrase he adds, "Social Security is not about profit maximization. It is securing maximum security." Well. Somehow I think this time around the opponents of privatization are going to have to come up with more compelling stuff.
George W. Bush may have made a very shrewd calculation in raising this issue and expecting Al Gore to rise to the bait. A recent Zogby Poll asks this straightforward question: "How likely would you be to support Social Security privatization if it allowed you to take your Social Security money and invest it in a retirement account of your choosing?" A whopping 68.7 percent of respondents said they support privatization. More than 80 percent of people 54 and younger favor the idea. And that support cuts across demographic lines—gender, race, income level, education level, union vs. nonunion, you name it. Americans want out of what they correctly perceive to be a Social Security system that is a very bad deal.
A quick visit to the calculator on Cato's special Web site, www.socialsecurity.org, reveals just how bad a deal Social Security is. Rates of return based on what Social Security now promises range from minus 2 percent to plus 2 percent. With Social Security's $20 trillion unfunded liability and a negative cash flow looming just 15 years away, one can be certain that the actual return will be much lower for most people. Using very conservative actuarial assumptions, analysts have shown that privatized accounts will yield two to three times the income now only promised by Social Security.
Proponents of Social Security privatization have powerful arguments on their side to ensure that the demagoguery will have little effect on the overwhelming majority that now support the idea.
- First and foremost is the issue of ownership. In Flemming v. Nestor (1960), the Supreme Court ruled that Americans have no property right in the money they are forced to pay in Social Security taxes—today 12.4 percent of their wages. What they get back at retirement is entirely up to 535 politicians. Under a privatized system, this indignity is avoided because the payroll tax is used to purchase real assets—stock and bond funds, money market funds, or insurance products—that you own and the politicians can't touch.
- Because you own real assets, you will accumulate wealth over your working life—wealth that will not only yield a more comfortable retirement but that you can leave to your loved ones, which is not the case with today's Social Security system. It is interesting that the people who wring their hands the most over the widening wealth gap between rich and poor, black and white, tend also to be the people who oppose allowing low- and moderate-income Americans to invest their payroll tax in mutual funds. A sociology professor from New York University was recently quoted in the Wall Street Journal saying, "The robust stock market has made racial differences in wealth even more pronounced." Really.
- Risk is an issue in this debate, but it cuts in favor of privatization, not against it. There is no 25-year period in American investment history in which stocks have not provided a higher return than the safest money market instruments. Further, while history shows that equities are the safest long-term investment, privatization doesn't require investing in stocks, if one prefers, say, government bonds. Yet over the 64-year history of Social Security, the politicians have increased payroll taxes more than 50 times. Talk about risk! The political risk of higher taxes and lower benefits (making an already paltry return even lower) is enormous.
As for Al Gore's baseless and counterintuitive claim that Social Security privatization is "bad for the economy," a Cato Institute study by Harvard professor Martin Feldstein estimates that the pres-ent value of investing in real assets the future flow of the payroll tax is on the order of $10 trillion to $20 trillion. Times have changed and George W. Bush is to be commended for recognizing that they have. Let the Great Social Security Debate of 2000 begin!
Edward H. Crane
This article originally appeared in the May/June 2000 edition of Cato Policy Report.