The Magazine

Let 'er Rip

Mar 21, 2005, Vol. 10, No. 25 • By FRED BARNES, FOR THE EDITORS
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PRESIDENT BUSH HAS GOTTEN A lot of bad advice lately on how to promote Social Security reform, but none worse than the recommendation he cease talking up individual retirement accounts funded by payroll taxes. Oddly enough, this advice has come from both Republicans and Democrats. Republican senator Lindsey Graham of South Carolina says Bush should concentrate on ensuring the solvency of Social Security. Investment accounts, he says wrongly, have nothing to do with that. Meanwhile, Democrats insist they won't sit down and negotiate a bipartisan compromise until the president abandons the idea of using payroll taxes for individual accounts altogether. This advice would be entirely comical if it weren't so transparently self-serving.

Our advice is quite different. Rather than fall silent on personal accounts, the president should talk about little else. Without the prospect of giving every worker, no matter how poor, a chance to invest in and actually own financial assets, Social Security reform loses its innovative quality. It is bereft of any political appeal, especially to lower income workers. It's no longer even real reform but merely a tug-of-war over how much Social Security taxes are going to be hiked or how far benefits are going to be cut.

Democrats would love to fight on this terrain. It would reduce Bush to their level and operate to their advantage. If the argument is over raising taxes or cutting benefits, Democrats will always win by emphasizing an increase in the Social Security tax rate (now 12.4 percent) or lifting the cap on income subject to payroll taxation (currently $90,000). Every poll or focus group shows that either of these is preferred to benefit cuts of any type. So imagine Bush in the position of arguing for slowing the growth of benefits or raising the retirement age. In either case, he loses politically and probably substantively as well.

But bring individual retirement accounts into the equation and everything changes. Forget today's polls that gauge the public support for these accounts as lukewarm. Touted heavily by Bush and Vice President Cheney and explained in TV spots, Social Security reform, Bush-style, will grow in popularity. Why? Because individual accounts offer something for nearly everyone. For the poor, reform provides an opportunity they otherwise would not have to invest in equities and acquire assets that are inheritable by their children. They would become stakeholders in America, and it would cost them nothing beyond the chunk of their income they're already paying in payroll taxes. And for everyone, rich or poor, it would mean a chance to boost their retirement income over what the current Social Security system would provide. Given the last 100 years of financial history, they can expect their investment income to grow more rapidly than money left in the Social Security system.

Let's clear up a couple of myths about the creation of individual accounts. The first is that accounts would play no role in making the system solvent for the remainder of the 21st century. Not true. For retirees with individual accounts, a portion of their retirement income would come from their investments in financial markets, not from payroll taxes paid by workers. This would not only contribute to solvency, it also would eventually allow for a cut in payroll taxes. True, other measures would be needed to ensure solvency. But absent individual accounts, the curbs on benefit growth or spikes in taxes would be greater.

Another canard is that personal accounts are the same as privatization. Not quite. Full privatization would let workers invest all their payroll taxes in whatever they chose. As envisioned by Bush and other reformers, the federal government would control how much a worker puts in an individual account, the range of investment options, and when the money could be withdrawn. That's hardly a libertarian approach. Oh, yes, there's one more phony charge: that picking what to invest in will be too complicated for many people. Nonsense. People choose car insurance, they decide among lottery selections, they weigh cable against satellite TV, they determine where to put their 401(k) or IRA money. Investment accounts will be no more difficult.