Score one for George W. Bush.On Monday the Texas governor took a major step forward in rallying the support of economic conservatives across the country with his bold proposal to partially privatize the Social Security system. By announcing his plan to allow workers to place a portion of payroll tax dollars in privately owned investment accounts, Mr. Bush also starkly differentiated himself from Vice President Al Gore, who advocates no changes to the current system. On this crucial issue of pension reform, it is now George W. Bush who is boldly attempting to design a modern 21st century retirement system, while Mr. Gore is tied to preserving a financially wobbly program that was originally designed back in the 1930s by Franklin Roosevelt.
As impressive as Mr. Bush’s privatization proposal was, the governor’s skillful and articulate defense of it in the wake of predictable liberal media criticism. This is ultimately an issue about who should control workers’ retirement dollars. The paternalist Al Gore says it should be the government. Mr. Bush rightly favors trusting workers to make wise decisions with their own money. And he is right on message here. The winner of this crucial election will be the candidate who reaches out to the burgeoning new investor class/ internet savvy voters which includes 80 million to 100 million Americans today. With more than half of all workers now owning stocks, Americans are fully capable of making their own financial decisions. It is highly insulting to our intelligence when Al Gore patronizingly pats us on the head and tells us we are not capable of making these decisions for ourselves.
The Democratic establishment refuses to acknowledge that the pay-as-you-go funding of Social Security will lead to financial turmoil within the next 20 years if innovative changes are not made today. The long-term unfunded liability of Social Security is a Mount Everest-sized $5 trillion to $10 trillion of red ink, a much larger financial black hole than even the national debt. If workers were permitted to place at least a portion of the 15 percent payroll tax into IRA-type accounts, that they personally own, they could tap into the magical power of compound interest which Albert Einstein once labeled “the most powerful force in the universe.” My strong preference would be to move toward a complete and immediate privatization of the whole system, not a partial plan. Nonetheless, George W. Bush deserves a chorus of applause from conservatives for being the first-ever presidential nominee of the two major parties to call for liberating Baby Boomers and Generation X workers from a system that robs them of their financial future.
The rate of return on Social Security these days is about 2 percent per year. Think about that from an investment standpoint. If your bank, mutual fund or investment adviser were earning just 2 percent a year on your savings, you would no doubt fire them in a nanosecond for gross incompetence. So why do we tolerate that kind of return from Social Security? If a middle-age worker man or woman younger than 30 were permitted to invest his or her payroll tax dollars in a safe, diversified mutual fund account, and that account earned 6 percent per year, which is below the historical average for the financial markets, the worker would have more than $1 million in a retirement nest egg at the age of 65. That nest egg would pay a monthly annuity payment, not 2, not 3, but 4 times higher than the benefit promised from Social Security.
Mr. Bush seems to have a keen eye for the politics of this issue. Young voters have deep skepticism about a retirement program that sends their dollars to Washington for supposed safekeeping. A Cato Institute survey found last year that 18- to 30-year-olds think it is more likely they will see a UFO (43 percent) than a Social Security check (28 percent) during their lifetime. The idea of being able to personally invest some or all of these dollars is obviously a highly attractive option for this Internet generation. Among the under-40 age group about two-thirds strongly support privatization.
Most of Mr. Gore’s response to the Bush plan was characteristically feeble, untruthful and a further indication of a shallow mind at work. For example, the vice president argued that the poor, minorities and women would suffer. That is dead wrong. Studies by the Cato Institute have proven it is black Americans particularly black men who get the worst rate of return from Social Security of any group. Black American males have much lower life expectancies 66 on average than white men and women. This means that black men often die right at the time they would be eligible to receive the benefits they spent a lifetime paying for. Under a privatized plan, they could leave their retirement savings to their spouses and children.
The Bush program would also empower millions of working-class Americans to become owners of stocks and bonds for the first time in their lives. They would, in short, move out of the dependency class and into the shareholder class. Ownership is the fastest way to get rich in America. Social Security taxes are so high today that many working families don’t have after-tax dollars to invest after paying the payroll tax. Working women, by the way, with a husband who works, get the worst deal of all from Social Security.
Mr. Gore charges that privatization would hurt the economy. This is the most absurd allegation of all. A recent study by economist Martin Feldstein, president of the National Bureau of Economic Research calculates that the gains to the American economy from privatizing Social Security would be in the trillions of dollars. When other nations, such as Chile, have moved toward private Social Security systems, their economies flourished, their savings rates soared, and worker incomes rose rapidly.
It is also noteworthy that many leading Democrats, including Sen. Robert Kerrey of Nebraska, have wholeheartedly embraced the privatization option. Mr. Kerrey says Democrats who oppose this form of worker capitalism are patronizing the poor “whose interests our party is supposed to represent.” Are you listening Al? The Democratic Leadership Council has also endorsed at least a partial privatization of Social Security. So just how risky and controversial can this plan be?
George W. Bush has shown an annoying tendency at times to sound more like a Clinton Democrat than a Reagan Republican, as evidenced by his litany of new spending initiatives unveiled in recent months. I have been as critical of Mr. Bush as anyone for this. But on the two issues that perhaps matter most to the future economic well-being of our nation, taxes and Social Security, Mr. Bush has admirably defined himself as a bold, original thinker. Al Gore meanwhile remains a captive of a status quo mindset. When it comes to retirement income and budget surpluses, Mr. Gore’s inclination is to trust government with the money, Mr. Bush’s is to trust us with our own money.
Mr. Gore says the Social Security issue now is “one of the starkest differences of opinion in this campaign.” For once, he is telling the truth. Mr. Bush wants a new deal for Social Security. Mr. Gore would continue with the current rotten deal. Yes, a stark difference indeed.
Stephen Moore is president of the Club for Growth.