Commentary

“Another risky scheme?” Hardly.

By Andrew G. Biggs
This article appeared on Cato.org on May 18, 2000.
It’s not just Vice President Gore who thinks that letting workers invest their Social Security in personal retirement accounts is a “risky scheme.” Even many who are sympathetic to the idea see George W. Bush’s proposal, if not as risky economics, as risky politics. “We will get hammered,” said one House Republican leadership aide last week. “We’re going to try our best to stay away from it.” But the political risks of proposing personal accounts are vastly overstated. In fact, America’s new economy and growing investor class mean the so-called “third rail” of politics is live no longer.

Economists have long advocated investment in higher-yielding stocks and bonds to help Social Security accommodate the retirement of the Baby Boomers and the slow-growing workforce of the 21st century. Unless reformed, Social Security cannot pay full benefits beyond 2015 without either tax increases or cuts in other spending. Long-term, Social Security’s deficits approach $21 trillion (in 2000 dollars). Texas governor George W. Bush’s plan to let workers invest a portion of their payroll taxes in stocks and bonds would increase the program’s return, leading to higher retirement incomes for seniors and a lower tax burden on workers. Personal accounts are good policy.

Personal accounts are also good politics. Personal accounts have strong bipartisan support, with prominent Senate Democrats like Bob Kerrey (Neb.), Daniel Patrick Moynihan (N.Y.), John Breaux (La.) and Chuck Robb (Va.) on board. Moreover, opinion polls show an obvious public desire to control one’s own finances. A March Zogby International poll of 1,024 likely voters found that, by an overwhelming 69 percent to 30 percent, Americans favor letting workers invest their payroll taxes in accounts similar to individual retirement accounts or 401(k) plans.

Enthusiasm for personal accounts crosses all traditional boundaries. Republicans support personal accounts (75 percent); but so do Independents (70 percent) and Democrats (63 percent). Men support accounts (71 percent), as do women (67 percent). Whites favor them (65 percent), but African Americans (75 percent) and Hispanics (89 percent) support accounts even more. All working-age groups, including retirees and near-retirees aged 55-69, support personal accounts. And, while 65 percent of people who call themselves “very conservative” support accounts, among those who describe themselves as “progressive or very liberal,” support rises to 72 percent.

Opponents of personal accounts dismiss public support as a “free lunch” mentality that will wither when confronted with issues like market risk. Will voters respond to charges that personal accounts are “casino economics?” Not likely. An August 1999 Zogby poll commissioned by the Cato Institute asked which was more risky: the stock market, which could lose value, or the current system, which cannot pay everything it has promised? Again, likely voters prefer the market. In fact, strong opposition to market investment comes only when it is performed by the government, as the Clinton administration has proposed. By a five-to-one margin, respondents said that workers, not politicians, should control Social Security investments.

But how will Social Security affect election 2000? Ninety-three percent of likely voters say a candidate’s position on Social Security reform will be “important” or “very important” in determining their vote. And Americans from all regions and of all races, genders and parties are more likely to support a presidential or congressional candidate in 2000 who favors personal accounts. Moreover, if Bush hopes to motivate young voters, consider this: 96 percent of likely voters aged 18-29 want the right to invest their payroll taxes, and by a six-to-one margin those Gen X-ers favor candidates who would give it to them.

Too many politicians and pundits find it hard to believe that ordinary workers would rather manage their own money than pay into a system that is quickly going broke. But today, a politician need not be courageous to favor personal accounts — just smart. Come election day, the real risk from reforming Social Security may be to those who oppose it.

Andrew G. Biggs is a Social Security analyst at the Cato Institute.