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.
