Commentary

Gore’s Phony Accounts

By Peter J. Ferrara
This article was first published by National Review Online, June 15, 2000. Copyright 2000 National Review.
Recognizing the broad popularity of the personal-account option proposed for Social Security by George Bush, Al Gore last week proposed a sham version of personal-investment accounts. In contrast to the Bush proposal, what Gore has proposed is not a solution to the problems of Social Security, but a new, big-spending, government entitlement program.

The Gore accounts are basically a rehash of the USA accounts Clinton proposed last year. There are two fundamental problems with the Gore accounts. First, workers would have to come up with more of their own money to pay into the accounts. Workers could not use a portion of the Social Security taxes they and their employers are already paying, as in the Bush plan. Low- and moderate-income workers would receive government subsidies and matching funds for their accounts. But this would involve huge amounts of new federal spending, in addition to the gargantuan total the government is already spending on Social Security. Clinton estimated that his USA accounts would cost close to $40 billion a year in new spending. Gore’s accounts would cost at least that much. All this government spending comes from workers as well, through taxes.

Second, the Gore accounts would do nothing to solve the problems of Social Security. Even if Social Security somehow paid all of its promised benefits, most young workers today would receive a very poor return on the taxes they paid into the system. For most, the real return after inflation would be around 1% or less. For many, it would be zero or even negative.

With the Gore accounts, workers and their employers would still be paying 12.4% of wages for this miserable deal. How can Gore ask workers to pay more when they are receiving such a bad deal for what they are already paying? Nor would the Gore accounts do anything to solve the long-term financial problems of Social Security. The accounts produce no change in Social Security revenues or expenditures, so they would not close in any way the huge long-term deficits shown by the government’s own projections. Social Security’s total unfunded liability of close to $10 trillion would not be changed by one penny.

The Bush plan, by contrast, would allow workers to get a better deal on the Social Security taxes they are already paying by allowing them to invest a portion of those taxes in the private-capital markets. These markets provide much better returns than Social Security promises (but cannot pay, again under the government’s own projections). Even at about half the average return earned in the stock market over the last 75 years, average-income workers investing all of their Social Security taxes in personal accounts would receive about three times the benefits promised by Social Security. Even low-income workers who receive special subsidies through Social Security would receive over twice what Social Security promises them.

Moreover, with workers relying on personal accounts in place of part of their Social Security benefits in the future, the Bush plan would reduce the long-term financial burden on Social Security. If the accounts were expanded and utilized broadly enough, the entire long-term financial problem of Social Security would be eliminated in this way, without raising taxes or cutting Social Security benefits. Instead of liberating workers by creating financial independence, the Gore plan is just another scheme to increase the dependence of workers on government. The idea is to use your own money to bribe you into the left’s political machine, through the government subsidies provided to USA accounts.

Don’t believe for a minute the American public will fall for this. The country is not in the mood for yet another big-spending entitlement program that evades the deep problems of the enormous entitlement programs we already have. What the American people want is freedom and prosperity, not dependence on a bad deal.

Peter J. Ferrara is an associate professor at the George Mason University School of Law and visiting fellow at the Cato Institute.