Commentary

Clinton’s Social Security Chief Backs Private Retirement Accounts

By Andrew G. Biggs
January 22, 2001
A politician is rarely more honest than when he’s leaving office. The need to shade the truth, make compromises and play politics is gone. The same goes for political appointees, and a recent interview by outgoing Social Security Administration Commissioner Kenneth J. Apfel, a Clinton administration appointee, takes the cake.

While in office, Apfel opposed all attempts to privatize Social Security. Now that he’s leaving office, Apfel says he favors President-elect Bush’s Social Security reform plan, which would let workers invest some of their withholdings in private retirement accounts.

Bush’s proposal, echoing the opinion of no less than six Nobel Prize-winning economists, proposes a fundamental change to Social Security. Rather than staying with pure pay-as-you-go financing, in which each generation of workers supports that generation’s retirees, Bush wants to let workers invest a portion of their 12.4 percent Social Security payroll tax in a personal retirement account.

By purchasing stocks and corporate bonds, workers would largely support themselves in retirement. The government would serve as a backup. Prefunding retirement benefits through personal accounts avoids many of the problems of lower birth rates, increased life expectancies and reductions in the worker-to-retiree ratio, which are hurtling Social Security toward bankruptcy. Thus, it minimizes the need for tax hikes, benefit cuts or increases in the retirement age.

Up until election day, Apfel had expressed “severe reservations” about the risks of personal retirement accounts, calling them ” a step in the wrong direction.” He was on board with Vice President Gore’s “risky scheme” attacks on the Bush plan. The SSA itself conducted a quiet press campaign arguing that private accounts would speed the system’s insolvency and leave workers at the whims of the stock market.

In a recent interview with the Boston Globe, however, Apfel all but admitted that some system of personal retirement accounts is necessary. Why? Because Social Security’s future benefit promises cannot be met and must be cut. The political left, Apfel said, “needs to be pushed on their mantra that benefits cannot be reduced, even for future generations. Social Security benefits are not going to be able to be as large as they are now in replacement rate terms for future generations because of demographic changes. The guaranteed benefit, and this is heresy on the left, will have to be somewhat lower.”

So Apfel agrees with Bush, not Gore, that the basic promised benefit coming from Social Security cannot be maintained.

More important, Apfel also agrees with Bush that Social Security should include additional savings on top of the reduced basic benefit. “There will be a need for a stronger savings component,” Apfel said, which should be “full and mandatory.” What does this mean? It does not mean, as the Clinton administration originally proposed, government investment in the stock market. It also does not mean, as Gore suggested, repaying government debt and crediting it to Social Security. Both of these would keep future benefit promises intact.

Apfel’s proposal, while couched in governmentese terms like “savings components” and “guaranteed benefits,” means that every worker would build real savings to supplement his basic Social Security benefits—in short, a Bush-style system or personal retirement accounts.

But Apfel, who is joining the faculty of the University of Texas at Austin, didn’t deliver only good news for the Bush team. He also warned: “The right needs to be pushed on their mantra that revenues cannot be increased for future generations for this system.” This need not, and should not, mean a tax increase. But it does mean that the money to fund personal retirement accounts must come from somewhere. That somewhere could be the budget surplus. Or it could mean reductions in existing spending programs. Either way, there’s no free lunch.

Apfel’s comments constitute a real victory for supporters of personal retirement accounts and hint that bipartisan compromise may be possible. If a Clinton administration appointee sees the sense in Social Security reform based on personal retirement accounts, maybe congressional Democrats will come around as well. Funny what a few months can do.

Andrew G. Biggs is a Social Security analyst with the Cato Institute’s Project on Social Security Privatization.