A president decides that Social Security is in need of radical reform. He assembles a team of experts to examine the issue and they conclude that allowing workers to privately invest a portion of their Social Security taxes in individual accounts is a viable way to solve the program's financial problems, increase the rate of return to young workers, and allow low income workers to accumulate real wealth. They conclude that most criticism of individual accounts -- they would be too risky, too costly to administer -- is unfounded. The president leans toward quick implementation.
George Bush? No. Bill Clinton. So much for the myth that Social Security privatization is a "partisan" or "conservative" issue.
According to three former top administration officials, President Clinton was strongly considering the partial privatization of Social Security prior to his impeachment in 1999. The revelation was contained in a paper delivered by David Wilcox, an assistant treasury secretary, Douglas Elmendorf, a deputy assistant treasury secretary, and Jeffrey Liebman, an aide with the National Economic Council, at a Harvard University conference last month.
According to these officials, the Clinton administration spent nearly 18 months secretly studying issues surrounding individual accounts and concluded that:
- Individual accounts were administratively feasible and would likely cost $20-30 per year per account to administer. However, to hold down costs, individual investment choices would have to be limited until accounts accumulated some level of minimum balance, perhaps $5,000.
- Market risks were not a sufficient reason to oppose individual accounts. Administration analysts found that long-term investment was, in reality, relatively safe. The administration also noted that the current Social Security system contains political risks that may well be worse than market risks.
- Concerns over redistribution could be addressed through the adjustment of benefit formulas, matching contributions or other means.
Wilcox, Elmendorf, and Liebman confirmed what many in Washington have whispered about for some time, that, while some in the administration -- -notably Vice president Al Gore and Treasury Secretary Robert Rubin -- -strongly opposed individual accounts, Clinton leaned in favor of them. Indeed, Clinton had his staff consider whether the administrative structure for individual accounts could be set up before Congress acted on any legislation to ensure that the accounts would be in place before Clinton left office. However, Clinton's plans were derailed by his impeachment over the Monica Lewinski affair. Faced with a need to strengthen his liberal base, Clinton abandoned any proposal for significant Social Security reform.
The revelation of Clinton's support for individual accounts is the latest example of the broad-based support for giving workers more control over their retirement funds. Washington has always found it easy to put short hand labels on things: left, right, Democrat, Republican. Therefore, the idea of Social Security privatization is called a "conservative Republican" proposal. But the truth has always been far more complex, with support for individual accounts cutting across ideological and party lines.
Perhaps that is because the facts are neither Democratic nor Republican. Social Security is facing a serious financial crisis, running a shortfall as soon as 2016. In fact, Clinton warned that there were only three possible ways to reform Social Security: 1) raise taxes, 2) cut benefits, or 3) find a way to receive a higher rate of return through private investment. Payroll taxes are already so high and benefits so low that young workers receive a rate of return on their taxes of barely more than one percent, far below market returns. Raising taxes or cutting benefits will only make that bad deal worse.
At the same time, the other flaws of the current Social Security system are becoming increasingly apparent. The program penalizes African-Americans, women, and low-income workers. Benefits are not inheritable and workers have no legal property right to those benefits, leaving their retirement at the mercy of politicians.
Only the third option -- private investment -- solves all of those problems. It preserves Social Security's solvency and increases returns to young workers while allowing workers to accumulate real and inheritable wealth.
Bill Clinton wasn't able to follow through on Social Security reform. That responsibility has now fallen to President Bush. But if workers are given ownership and control over their payroll taxes -- if Social Security is updated and modernized -- that may ultimately be a surprising part of Clinton's legacy.