Commentary

A Critical First Step

By Derrick A. Max
This commentary originally appeared May 15, 2000 on National Review Online.
It is said that every journey begins with one step. This is only true, of course, if you opt to walk or run instead of taking a plane, train, or automobile. Today, Governor Bush opted against motorized transportation and instead proposed to take one giant step in the right direction on the critical journey to a fully privatized Social Security system.

In a speech at a seniors’ center in Rancho Cucamonga, California, Bush released his six key principles for Social Security “modernization” — the last and most important of which includes the politically explosive idea of allowing young workers to voluntarily divert a portion of their existing payroll taxes into personal retirement accounts. While it is unclear as to exactly how much could be diverted and who would be eligible (how does Bush define “young”?), Bush made it clear that the accounts would be individually owned, could be invested in the stock market and would be fully inheritable. Bravo.

At a time when Bush is finally moving ahead in the polls, he has chosen to risk his momentum on a proposal that is sure to ignite a firestorm of criticism and is bound to be demagogued by its many detractors. In fact, within two hours of Bush’s speech, Vice President Gore criticized the Bush proposal by saying that it would create a system of “winners and losers,” that it would “jeopardize retirement security for too many Americans,” and that it would “weaken our economy and undermine the basic guarantee of a minimum decent retirement.” Fortunately for Bush, these criticisms are likely to ring hollow — and it is significant that Gore actually toned down his hysterical “risky scheme” rhetoric.

Polls show that a vast majority of Americans now support private accounts as an alternative to the current Social Security system. This is due in large part to the fact that over fifty percent of Americans now invest on their own. These investors understand that over the long term there is more security in stocks than in government promises. They understand that Social Security’s rate of return of approximately 2.2 percent is dwarfed by the returns that they could earn in the private market, even under the most conservative investment strategies. They understand that more money in the markets will lead to increased savings, lower capital costs, and a stronger economy. In short, they understand that prefunded individual accounts are more likely to produce greater, not less, retirement income.

The popularity of this proposal is catching on quickly. Support for private retirement accounts now crosses party lines. As pointed out by Governor Bush, a broad coalition of Democrats and Republicans in both the House and the Senate have introduced legislation to implement private retirement accounts as a part of Social Security reform. These politicians realize that this idea — far from being a “risky scheme” that would “jeopardize retirement” — is actually a sensible alternative to a system that is quickly going broke. In fact, the real risk lies in maintaining a system that has already amassed an unfunded liability of over $9 trillion and is scheduled to begin running cash- flow deficits in less than 15 years.

With broad public support, a bipartisan coalition, and a sound economy, now is the time to move quickly and completely to end our failed government-run retirement system. Unfortunately, the Bush proposal appears to limit unnecessarily the amount invested in private accounts. While Bush avoided specifying exactly how much would be privatized under his proposal, he tips his hand by noting that “future Social Security surpluses would be locked away for Social Security.” Because the Social Security surplus is currently (and for the near term) less than 3 percent of payroll — to maintain a surplus, Bush must be envisioning accounts of less than 3 percent. This mirrors the proposal supported by most of the senators and congressmen singled out in Bush’s speech.

While Bush should be applauded for taking a giant step in the right direction — particularly considering Vice President Gore’s desire to man a rocket pointed in the wrong direction — I hope that the popularity of private accounts will lead to a reexamination of the amount being privatized. The power of compounding works better on a larger base. Americans ought to have the freedom to invest and own the entire 12.4 percent they pay into our current system — anything less, while welcome, would be too little.

Derrick A. Max is director of government affairs at the Cato Institute.