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Paving the Way for Privatizing Social Security

By Glenn Kessler
Washington Post Staff Writer
Tuesday, June 26, 2001; Page A01

Three years ago, when Lawrence B. Lindsey first began briefing then-Texas Gov. George W. Bush on economic policy, he traveled to Austin with a list of economic problems to discuss.
"Social Security was on the list," recalled Lindsey, now the president's chief economic adviser. "And I remember just saying, 'Social Security.' He said, 'The answer to that is obvious: We have to go to personal accounts.' "
Bush may not have been schooled in the nuances of federal economic policy, but his conviction that it was necessary to dramatically change Social Security reflected a consensus that had taken hold in the Republican Party.
There has always been a segment of the GOP suspicious and even scornful of Social Security. But the privatization movement, now embraced by virtually all elected Republicans and some Democrats, has provided a new and highly effective platform to critique and possibly retool the Depression-era retirement program.
Two decades ago, another conservative president, Ronald Reagan, suffered politically when he tried to take on Social Security, and he ultimately agreed to a plan that left the current system intact. But that fate seemed to elude Bush in the election last year, despite heavy Democratic attacks. What has happened in the intervening years is that Republicans -- in particular several conservative economists and three think tanks -- carefully laid the intellectual and academic groundwork for converting at least part of Social Security to a private-account system.
Bush's embrace of the concept has placed at the center of the policy debate an idea once derided as a crazy plot to dismantle Social Security. Bush has created a presidential commission to consider ways to partially privatize Social Security, and he promises an all-out effort next year to win congressional approval -- the losses suffered by millions of Americans in the recent stock market decline notwithstanding.
The administration still faces significant political risks. Social Security is the most popular government program ever created, an important source of income for retirees and a key to Democratic political fortunes for decades. Establishing individual Social Security accounts, which would allow Americans to direct their payroll tax contributions to stocks and other investments, would radically reshape an old-age retirement program that now pays fixed levels of benefits.
But the presidential imprimatur has given the privatization movement significant momentum. Advocates who have spent years working for this moment have not only the support of the president but also important links to his aides and the presidential commission.
Harvard professor Martin Feldstein began to argue in the early 1970s that Social Security was largely responsible for the low saving rates of Americans because it created the illusion that they were wealthy enough to face retirement. That critique led directly to the notion of giving Americans control over their own accounts. Two of Bush's key aides on Social Security issues, Lindsey and R. Glenn Hubbard, chairman of the Council of Economic Advisers, studied under Feldstein at Harvard. Feldstein was also an economic adviser to Bush during the campaign.
Feldstein directs the influential National Bureau of Economic Research, which has produced scores of papers on the economic impact of Social Security privatization.
The Cato Institute, a Washington think tank, has spent about $3 million in the past six years to run a virtual war room to promote Social Security privatization. Although Cato actually wants to remove all Social Security retirement funds from government hands -- compared with the partial approach preferred by the Bush administration -- the think tank's reports, conferences and books have made it a significant part of the debate. Two members of Bush's Social Security commission, Sam Beard and former representative Timothy J. Penny (D-Minn.), are on a Cato privatization panel, and Cato staff members have been assigned to the Bush commission.
Cato, along with the Heritage Foundation and the Dallas-based National Center for Policy Analysis, also popularized the notion that Social Security was a bad deal for blacks and other minorities who form the core of the Democratic political base. They argue that because the life expectancy is lower for those groups, minorities would benefit more from accounts that could be passed on to heirs.
In 1997, Cato President Edward H. Crane and Jose Pinera, who co-chairs Cato's Social Security program and helped privatize the Chilean social insurance system, flew to Austin to have dinner with Bush and discuss private accounts. Crane said that after Pinera's presentation, Bush declared, "This is the most important policy issue facing the United States today."
Karl C. Rove, Bush's senior political adviser, said the president was interested in private accounts even before he met with the Cato officials, having read a book by Peter Drucker that discussed the rise of private pension funds and retirement accounts. After the Cato meeting, Bush observed that "people view it as political dynamite and are reluctant to touch it," Rove said. But Bush was interested in pursuing it; he even devoted a sentence to the idea in the speech announcing his candidacy on June 12, 1999.
Social Security privatization manages to combine several powerful strands of conservative philosophy, such as empowering individuals through greater wealth and financial independence and limiting the scope of government. At the same time, it appeals to libertarians such as the Cato Institute, which disagrees sharply with conservatives on issues including gay rights and drug laws. Many other industrialized countries, such as Britain, Australia and Sweden, have moved to create private accounts as part of their social insurance systems, allowing advocates to say that the United States is lagging behind the rest of the world.
Social Security is a pay-as-you-go system, meaning that payroll taxes collected today are used to pay benefits for retirees and other beneficiaries. Benefits are progressive, giving low-income workers a slightly better return, and are based on factors such as how long people worked, how much they made and at what age they retired. Excess payroll taxes are being used to pay down the national debt, and the government has made a political commitment to use the accumulated surplus, plus interest, to pay benefits at some point in the future.
Under some projections, the pending retirement of the baby boom generation will greatly reduce the ratio of workers to retirees, making it more difficult to pay all promised benefits. The potential financial crunch has allowed privatization advocates to make the case for urgent action, though many say solvency issues are less important than convincing Americans that they are getting a raw deal under Social Security.
Stuart Butler, vice president for domestic policy studies at the Heritage Foundation, said the think tank pushed hard in the early 1980s to expand individual retirement accounts and 401(k) plans, in essence creating a private system that would mirror Social Security and introduce Americans to the concept of individual accounts. In 1983, Butler co-wrote an article for the Cato Journal suggesting that the rise of IRAs would educate Americans on the virtues of stock ownership and ultimately undermine support for Social Security.
"The strategy worked perfectly," Butler said, because advocates were able to begin making the case that the return from Social Security lagged behind personal investments. "That was a turning point in this debate. How do you get the best value for the dollars invested?"
Personal accounts appeal to the president because he "comes from the empowerment wing of the Republican Party," Lindsey said. The president, he said, sees private accounts as a way "to move from a society of paycheck collectors to a society of owners and savers."
The challenge for the administration and other advocates of personal accounts is to construct a plan that can deflect the inevitable political attacks.
Henry Aaron, a Social Security expert at the Brookings Institution who opposes privatization, said he has the "highest respect" for the political skill advocates have shown in trying to shape public opinion. "But until we have a real live proposal that people can look at and weigh the pluses and minuses," Aaron said, "we won't know what the staying power of this issue is."

� 2001 The Washington Post Company

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