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.
