Commentary

Al Gore’s Risky Scheme

Would someone please send Vice President Al Gore a thesaurus? He seems incapable of going more than three sentences without calling some proposal of Texas Governor George W. Bush a “risky scheme.” But focus-group-tested scare phrases are no substitute for serious policy proposals, and nowhere is this more important than on the crucial issue of Social Security reform.

Bush has proposed that young workers be allowed to invest a portion of their social Security payroll taxes, and Gore has responded by calling the proposal “stock market roulette,” “gambling with retirement” and — all together now — “a risky scheme.”

The vice president is simply wrong about the risks of market investment. While in the short term, markets will certainly go down as well as up, over the long term markets are a remarkably safe investment. As Gore himself once pointed out, “One of the single most important, salient facts that jumped out at everybody is that over any 10-year period in American history, returns on equities are just significantly higher than” returns on government bonds. Social Security reform isn’t even about 10-year holding periods. It is about 30 or 40 years of saving and compound interest. And the fact is that, over any period of 20 years or more, stocks have never lost money. That includes the Great Depression, a world war, several recessions and the “stagflation” of the 1970’s.

Americans understand that. Millions of American workers are invested in the market through individual retirement accounts (IRAs) or 401(k) plans at work. Imagine how foolish Al Gore would seem if he said that 401(k) plans are a “risky scheme.” Do Americans think of their IRAs as “Wall Street roulette?”

Even disregarding the bull market of the last few years, the inflation-adjusted return from stock investment has averaged 7.2 percent per year over the past 75 years. Compare that to an expected future return from Social Security of barely 1 percent. Even investing in government bonds would provide returns two or three times higher than does Social Security. One wonders how Al Gore can call that “risky” with a straight face.

What is risky, in fact, is Gore’s proposal to do nothing about Social Security reform and burden future taxpayers with huge new liabilities. He would not make any structural changes to the program, using instead current budget surpluses to pay down the national debt. That may or may not be the best use of the surplus, but it has absolutely no effect on Social Security. The plan would eventually save the federal government close to $230 billion per year in interest payments, money with which Gore proposes “crediting” the Social Security Trust Fund in an amount equal to the interest savings.

On paper, this would extend the life of the trust fund until approximately 2050. But as the administration’s own budget acknowledges, the trust fund does not represent real assets, merely claims against future tax revenues.

Essentially, Gore is proposing to add more IOU’s to the trust fund. He then hopes that the money saved by not having to pay interest on the debt will be available to pay those IOUs when they come due, which assumes, of course, that Congress will not spend any of the additional funds. Anyone care to take a bet on that?

Moreover, even if every penny of interest savings were preserved for redeeming the IOUs, the Gore plan would fall far short of producing the amount of money necessary to prop up Social Security. By 2015 Social Security will begin running a deficit, spending more on benefits than it takes in through taxes. At that point, trust fund IOUs notwithstanding, the program cannot continue to pay its promised benefits without additional revenues. Dedicating all $230 billion of interest savings to Social Security would only put off this deficit until 2021. After that, Social Security benefits would either have to be cut or taxes would have to be raised.

The Congressional Budget Office, looking at the Clinton-Gore plan for Social Security reform, warned that “the proposal to transfer general revenues to the Social Security trust funds would extend the funds’ solvency from an accounting point of view, but would not alter the underlying long-term imbalance between total federal revenues and spending” (emphasis added). The General Accounting Office was even more blunt: “[The Administration’s proposal] does not represent a reform plan.”

In other words, Al Gore’s plan is to avoid any real Social Security reform and hope that someone in the future figures out a way to pay benefits. Now, that is a risky scheme!

Michael Tanner is director of health and welfare studies at the Cato Institute.