Bush Says Private Accounts Are a Part of the Solution
Long before he took possession of the White House, before he talked the issue to the top of the national radar screen, George W. Bush began making the case for personal investment accounts in Social Security.
Bush was promoting private accounts as far back as his unsuccessful race for Congress in 1978, five years before a federal commission came up with a combination of tax increases and benefit cuts to avert an imminent financial crisis.
Today, he is promoting them still, even after acknowledging that private accounts alone wouldn’t repair the fiscal imbalance that is expected to drain the Social Security trust fund by 2042, according to the system’s trustees.
“I fully recognize a personal retirement account is not the only thing needed to ... solve Social Security permanently, but it’s a part of a solution,” the president said Friday during a forum in Omaha, one of five stops on a two-day road tour to sell his restructuring initiative.
If private accounts wouldn’t fix Social Security’s finances, why bother? The answer, for Bush, appears to be partly economic and partly political. But at its core is an unwavering ideological commitment to personal ownership as an alternative to government assistance, his advisors say.
“People ought to be encouraged to own something in America,” Bush said at Friday’s second stop in Little Rock, Ark. “You’ll be owning a part of your retirement account. It’s actually your money to begin with. It’s not the government’s money. You’re paying it in.”
According to several administration allies and adversaries, Bush’s bedrock belief in individual ownership as an antidote to collective dependence transcends for him any argument over the severity of Social Security’s financial shortfall or the merits of other potential fixes.
“There is a tyranny of the Great Society that afflicts a lot of Americans,” said Michael Franc, vice president of the conservative Heritage Foundation and an informal administration advisor. “The solution that is coming from Bush’s conservative ideology is to give people some personal ownership and control. He is looking at this as a pivotal moment in what we do with all the promises that were made in the ‘60s and ‘70s. We can no longer keep those promises.”
If weaning Americans from government assistance improves Social Security’s finances and pays big political dividends, all the better, Bush allies say.
“The president just believes personal accounts are good policy in terms of giving people more control, more choice, the ability to pass money on to their kids,” said Jeffrey Brown, a University of Illinois finance professor who is advising the administration on Social Security. “The issue of ownership and control would be important even if we were starting off with a system that was relatively balanced, which we’re not.”
Some Bush critics suspect a darker motive at work. Although Bush says his intent is to strengthen Social Security for the ages, some opponents of his plan say personal accounts are the first step in a conservative campaign to systematically deconstruct the New Deal.
“They want to dismantle Social Security and replace it with private accounts, even if there is no assurance that anybody would be better off and even if many would be worse off,” said Rep. Sander M. Levin of Michigan, the senior Democrat on the House Ways and Means Social Security subcommittee. “It’s a Darwinian, survival-of-the-fittest, everybody-on-their-own philosophy.”
Dean Baker, director of the liberal Center for Economic and Policy Research and co-author of the 1999 book “Social Security: The Phony Crisis,” said that even if Bush sincerely wanted to shore up the system, some conservatives saw personal accounts as an opportunity to tear it apart.
“I really believe they want to dismantle the big social programs, Social Security and Medicare,” Baker said. “They know they’re hugely popular. They can’t just say, ‘We’re going to take these down.’ So they’re trying to convince people they’re giving them something in return.”
In the case of Social Security, that something would be personal accounts. Bush has proposed giving all workers born in 1950 or later the option to divert into private investment accounts a maximum of 4 percentage points of the 12.4% Social Security payroll tax.
The money in the private accounts could be invested in broadly diversified stock and bond funds. When workers reached retirement age, they would convert all or part of their private accounts to annuities that would pay them a guaranteed stream of income. Any money not used to buy an annuity could be passed on to heirs.
Under Bush’s plan, the traditional Social Security benefits paid to private account holders would be reduced to offset the money diverted into their accounts over the years. If workers earned an average annual return of 3% after inflation, the benefit reduction would be the same as their account value. If they earned better than 3%, they would come out ahead.
But those cuts in benefits wouldn’t fix Social Security’s solvency problems. So Bush is expected to endorse other, potentially bigger cuts for all Social Security recipients to close the gap between future payroll tax collections and benefit payouts.
The White House says those cuts are subject to negotiations with Congress. But it has held out as a blueprint a proposal to tie future increases to the rate of inflation instead of wage growth, a change that could reduce promised benefits by at least a third for workers now entering the labor force.
The economic argument underlying the president’s proposal is that substantial tax increases or benefit cuts are unavoidable to erase the long-term shortfall, and Bush has ruled out raising payroll taxes. And, the argument goes, if benefits must inevitably be chopped to bring Social Security into balance, why not let workers open private accounts that might make up some of the difference.
“The Social Security crisis is not that the system is bankrupt in 2042,” said Grover Norquist, president of Americans for Tax Reform and an administration confidant. “The crisis is that 25-year-olds get less than a 1% rate of return on their payroll taxes. That crisis is now.”
Norquist acknowledged that for some conservative activists, including himself, the ultimate objective was to eventually replace traditional Social Security benefits with a system of individually owned accounts.
“If the left views the purpose of the New Deal as making older people dependent on politicians, then this will in fact undo the New Deal,” Norquist said. “But if you view the New Deal as trying to give older people independence and dignity in retirement, then the president’s reform provides that.”
Some also see personal accounts as a way to constrain government growth. Bush’s initiative would require Washington to come up with as much as $2 trillion over several decades to replace the payroll tax revenue diverted into private accounts. Although those “transition costs” eventually would be offset by benefit reductions, the initial effect would be to tighten the government purse strings.
“There is within the current Republican coalition a group of starve-the-beasters who believe that by keeping revenues low and keeping pressure on the budget, one can steadily reduce the size of government,” said Henry Aaron, senior fellow at the centrist Brookings Institution.
Conservatives also cite a potential political benefit. Research suggests that support for Republican candidates and policies is higher among the roughly half of American households that own stock. Allowing younger workers to open private investment accounts in Social Security would further expand the pool of shareholders.
“If you can move from a nation where 50% of Americans own stock to a nation where 75% to 80% own stock, you could change political attitudes and the political culture in a way that’s more conservative and more pro-Republican,” said Stephen Moore, former president of the Club for Growth, who recently founded the advocacy group Free Enterprise Fund.
The fact that the White House is now acknowledging that private accounts would not by themselves ensure Social Security’s solvency shows the president’s agenda is driven more by ideology than by economics, according to some insiders.
Some administration critics say that admission could undermine support for Bush’s restructuring campaign.
Barbara Kennelly, a former Democratic congresswoman who heads the National Committee to Preserve Social Security and Medicare, said some members of Congress were starting to question the motivation behind the push for private accounts.
“He is dismantling Social Security in the name of fixing a crisis that doesn’t exist,” Kennelly said. “He does not believe that government should play a role in healthcare or secure retirement. He’s like a dog with a bone, and he can’t let go.”
Times staff writer Edwin Chen in Little Rock contributed to this report.
