Commentary

Dancing on the Third Rail; Bush Bets on Social Security

By Derrick A. Max
This article originally appeared on National Review Online, May 2, 2000.
In a move that is sure to have his political advisers gulping Pepto-Bismol for the next several months, George W. Bush has floated the outlines of a proposal that would allow individuals to invest up to two percent of their current Social Security payroll taxes in privately controlled equity accounts. In fact, Bush has promised to make partial privatization of Social Security a central component of his presidential campaign. He has chosen to dance on the supposed “third rail” of American politics.

Why would Bush risk the presidency by taking such a bold move? Simple. With over 50 percent of Americans already investing their own money in the market, polls show that a wide majority of Americans favor Social Security privatization. A recent Cato Institute/Zogby poll showed that by a margin of almost forty points (68 to 30 percent), likely voters support privatization of Social Security. A closer look at the poll data shows that privatization is strongly supported by almost all race, age, income, gender and political categories. This represents a radical shift toward support for privatization and a drastic deterioration in support for our current government-run retirement system.

Not only is Social Security privatization popular, it is also good policy. Our current Social Security system is on the brink of collapse. While the system is not scheduled to go completely broke until 2038, benefit payments will begin outpacing payroll-tax revenues in 2015 — at which point the government will have to scramble to find enough resources to cover all of the bogus IOU’s (bonds, for you finance majors out there) it has been issuing for the last two decades. In fact, in 2020, the government will have to either raise taxes or cut spending by $95 billion in order to meet its shortfall in that one year alone. When children born today retire, they will face either benefit cuts of over 25 percent, or payroll tax rates of over 18 percent (an increase of almost 50 percent), in order to meet current benefit promises.

Finally, our current Social Security system provides a dismal rate of return. Workers retiring today will receive an average rate of return on their lifetime of payroll taxes of only 1.6 percent. Worse yet, individuals born today can expect to receive returns on their payroll taxes barely exceeding 0.9 percent — assuming the system doesn’t go completely bankrupt before they retire. For today’s market-savvy voters, these rates of return are completely unacceptable. Voters know that over the long term, market investments have averaged real returns in excess of 7 percent — a rate that could significantly increase the retirement income of almost all retirees if the system were fully privatized.

While it would be nice to see an honest policy debate on the virtues and dangers of the Bush proposal, it is unlikely that such a debate will occur. When facts, polls, and principles are aligned against you, the rules of debate tend to change. It is more likely that Vice President Gore will avoid quibbling over such pesky matters as rates of return, ownership, and insolvency — and instead obfuscate, exaggerate, and even lie to scare the electorate into opposing Bush’s modest proposal.

Indeed, in his first public comments on the Bush plan, Gore attacked as “too risky” any proposal that would allow private investment of Social Security funds in the stock market. When reminded that the Clinton administration had itself proposed allowing the government to invest Social Security surpluses in the stock market, Gore stated that the administration had never “proposed” allowing such investments, but had instead “discussed” the issue publicly. Then, as if to close off any further questions, Gore noted that the administration had rejected the idea after Alan Greenspan warned of the inherent risks of allowing a government entity to invest in private markets.

Really? Maybe Gore should read page 37 of the latest budget submitted to Congress in February by the Clinton administration. In the second paragraph explaining Clinton’s plan to shore up the Social Security system by transferring surpluses into the Social Security trust fund, the budget reads: “The President also proposes to invest half of the transferred amounts in corporate equities…” Likewise, last year’s budget submitted by the President noted that “the administration proposes tapping the power of private financial markets to increase the resources to pay for future Social Security benefits.” (Emphases added.) I guess it depends what the definition of “propose” is? Furthermore, our chronologically-challenged Vice President appears to have forgotten that Greenspan’s testimony on this matter occurred over a year before the administration submitted its budget.

Most troubling, though, is Gore’s statement that Bush’s proposal to allow individuals to divert 2 percent of their payroll taxes to private accounts would force cuts in the benefits being paid to current retirees. Is that right? Doesn’t Gore knows that the current cash surpluses devoted to Social Security exceed 2.3 percent – and so, a two percent diversion would not affect current benefits at all? Of course he does, but why rely on facts when they don’t support your position?

The debate over the future of Social Security is literally the debate over the future of government. It is, in the end, a question of dependency. Will we continue to work our entire lives, ceding 12.4 percent of every paycheck we earn to the government on the mere hope that when we retire, the government will find it in their good will to send us a monthly check? Or will we begin to shift toward a system that allows us to save, invest, and plan for our own retirement? In a debate this important, we should all be willing to dance on the “third rail” if it will help electrify support for this effort. I believe Bush has taken a principled and popular position that will eventually lead him to the White House. Someone should pass the Pepto-Bismol to the Gore team.

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