How Bush Lost Personal Accounts
by Peter Ferrara on 10/30/2008
24 Pages
In his 2000 Presidential campaign, then candidate George Bush brilliantly advanced his proposal for personal accounts for Social Security with positive, even populist, rhetoric. He focused entirely on the personal accounts and all of their enormous advantages, such as higher market returns and benefits, personal ownership and control, freedom of choice, and the creation of family wealth that can be passed on from parents to their children.
The Social Security reform proposal that followed the principles on which President Bush campaigned was introduced in 2005 by Rep. Paul Ryan (R-WI) and Sen. John Sununu (R-NH). That bill would have allowed workers to shift the entire employee share of the Social Security payroll tax to the personal accounts. Over time, the bill would have allowed workers to shift all their Social Security retirement benefits to the personal accounts as well.
From such a proposal, workers would end up with substantially higher benefits from the accounts than Social Security even promises, let alone what it can pay. That results because market investment returns are so much higher than the returns that purely redistributive, non-invested, Social Security can pay.
But the staff appointed to carry out the President’s personal account initiative viewed steep benefit cuts, and tax increases if necessary, as the essential focus of reform, with personal accounts as “the dessert”. This suited perfectly the opponents of personal accounts, who knew they could use the steep benefit cuts and tax increases to defeat the entire reform.
The centerpiece of President Bush’s Social Security reform plan thus shifted to something called price-indexing, rather than personal accounts. Price-indexing would reduce future promised Social Security benefits by close to 40%. It would reduce the effective rate of return promised by Social Security each and every year, eventually forcing everyone well into the negative range. It would reduce the proportion of pre-retirement income replaced by Social Security each and every year as well, until Social Security benefits became relatively insignificant.
By 2005, there was little evidence of the positive themes that the President had so successfully used in arguing for personal accounts during his 2000 campaign. All of that was obscured by Pain Caucus alternatives that were now the focus of the President’s plan.
The complete collapse came in the summer of 2005, when President Bush started saying “personal accounts will not solve the problem.” The bold breakthrough on personal accounts for Social Security had now collapsed.
It was thus the Pain Caucus model that failed, not the personal account model. It was the Pain Caucus that actually killed Social Security reform and personal accounts, not AARP, or the Left.
Recent extensive polling by Newt Gingrich’s new organization American Solutions shows that support for personal accounts for Social Security is still in the mid to high 60s. But achieving such reform will require new leadership.
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