Bill Clinton's Social Security options

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In a recent editorial, The Washington Times reminded its readers that then-President Clinton, in a major policy speech delivered in February 1998 at Georgetown University, warned about "the looming fiscal crisis in Social Security" that "affects every generation." Today, congressional Democrats are downplaying Mr. Clinton's "looming fiscal crisis" in an effort to sabotage any reform effort that might include individual (or personal) retirement accounts.

Mr. Clinton had good reason to be worried about Social Security's long-term future. When he delivered his Georgetown speech, he had been in office for more than five years, during which time he labored over the federal budget and the long-term consequences of fiscal policy. In addition, before the 1998 speech, three national panels had already been commissioned during the Clinton administration to review Social Security reform options: the Bipartisan Commission on Entitlement and Tax Reform (1993-1995); the 1994-1996 Advisory Council on Social Security; and the 1997-1998 National Commission on Retirement Policy.

All three panels offered long-term reform plans that included individual accounts. Moreover, a policy paper presented in June 2001 and published by the National Bureau of Economic Research the following September revealed that the Clinton administration itself intensively analyzed such accounts as part of a long-term solution to "the looming fiscal crisis." Indeed, within days of Mr. Clinton's Georgetown speech, "the administration launched a systematic process to develop a Social Security reform plan," according to the very revealing 2001 paper -- "Fiscal Policy and Social Security Policy During the 1990s" -- delivered at a Harvard conference. The paper was written by three former senior Clinton administration policy-makers: Douglas Elmendorf (deputy assistant secretary of the treasury), Jeffrey Liebman (special assistant to the president for economic policy) and David Wilcox (assistant secretary of the treasury).

The authors respectfully noted that "[t]he administration's economic team was also aware of a significant group within the Democratic Party that downplayed the need for Social Security reform." Then, they proceeded to demolish the Democratic group's arguments, which today are being repeated by pro-status quo Democrats.

While the administration's high-level working group was reviewing the options, the rapidly growing economy and the soaring stock market were on the verge of turning longtime budget deficits into budget surpluses, which were soon to be projected for years into the future. Admittedly, the imminence of these surpluses stoked the president's interest in exploiting the superior returns offered by stock and bond investments. At the same time, however, "the president also made clear that all reform options other than an increase in the payroll tax should be on the table." To this end, "much of the effort ultimately was directed toward devising ways of bridging the gap between the defenders of the current defined-benefit system and advocates of individual accounts."

Focusing on (1) administrative feasibility and costs, (2) portfolio market risk, (3) political interference in markets and corporate governance and (4) redistribution, the working group rigorously studied the option of investments in private financial assets. It concluded that "such a system could be run at an annual cost of $20 to $30 per account." The economic team also "did not think that market risk was a sufficiently important concern to rule out plans that involved equities." Concerns about redistribution and political interference "under a system of individual accounts" could also be adequately addressed, the working group concluded.

Having resolved its primary concerns, the working group "believed that there was more potential for substantive consensus on Social Security reform than the heated rhetoric on the topic suggested." Optimistically, the authors report that "on two of the most disputed issues -- whether investment in private securities should be handled collectively or individually, and whether individual accounts should be created as part of Social Security -- there was nearly a continuum of options; and proposals from the left and right seemed to be moving toward each other."

Approvingly noting that even "some of the Republican proposals involved redistributive funding of individual accounts," the authors reported: "Thus, by late 1998" -- this timing will be seen to be crucial -- "there appeared to be the possibility for convergence around using non-Social Security funds to make redistributive contributions to individual accounts, contributions that might or might not bear any direct mechanical relationship to the traditional Social Security system." There were three "reform plans that occupied the 'policy space' defined by this possible convergence of views." The first would have implemented add-on individual accounts financed either by surplus general revenues, which would compensate for cuts in traditional benefits, or by additional mandatory contributions. The second option, based on a plan developed by former Reagan Council of Economic Advisers Chairman Martin Feldstein and introduced in Congress by Republican Ways and Means Committee Chairman Bill Archer, would also use surplus revenues to finance individual accounts. The third option was a "hybrid" plan that "included both trust fund investments in equities and the establishment of small individual accounts."

While the budget surplus clearly played a major role in the individual accounts countenanced by the working group, it must also be acknowledged that any of the three "policy space" options would have represented an opening bid by the Clinton administration, subject to negotiation with and revision by the Republican Congress. "In the end," however, "President Clinton decided to pursue Social Security reform based on bolstering the Social Security trust fund rather than on creating individual accounts," the authors recalled. Cryptically, Messrs. Elmendorf, Liebman and Wilcox concluded: "This decision may have been influenced by the changing political dynamic in late 1998, as the possibility that the president would be impeached came clearly into view. Whether the president would have pursued a different approach in the absence of impeachment will never be known." In other words, the grossly irresponsible president's decisions to engage in sexual relations with a White House intern and then to repeatedly lie about it forced him to embrace his liberal Democratic base (and their aversion to individual retirement accounts). In the end, it probably cost Mr. Clinton what the authors call "the Rooseveltian legacy," which would have "come from putting Social Security on secure ground for the coming century."