What was George W. Bush thinking when he proposed to replace part of Social Security with
private retirement accounts? Bush has faced several legislative defeats lately, but nothing has
quite bombed like his Social Security program.
His Social Security commission was deliberately stacked with nominally bipartisan experts who had
only one thing in common. They all supported partial privatization of Social Security.
The approach had a core intellectual dishonesty going in. It deliberately confused the issue of how to
shore up Social Security's finances with the lure of possibly higher returns on private accounts.
Alas, diverting part of the payroll tax to fund new private retirement accounts would only increase the
shortfall in the present system. This, in turn, would require new deficit spending, new taxes, or reduced
benefits. So, far from solving the shortfall, new private accounts would make it worse.
In the past week, the folly of this approach became politically apparent. A hysterical interim report by
Bush's commission grossly exaggerated the financial threat to the present system. It was roundly
denounced by editorialists for fear-mongering, and it gave the Democrats new ammunition.
Then two conservative congressmen, with rare political candor, turned the president's basic approach
into draft legislation. Jim Kolbe, an Arizona Republican, and Charlie Stenholm of Texas, a leader of the
fiscally conservative Blue Dog Democrats, cosponsored a bill to carry out partial privatization. As a
logical consequence, their bill also required a delay of the retirement age, an increase in taxes, and a
reduction in benefits.
Republicans wasted no time in running for cover. One of the first to oppose the bill was the Republican
House speaker, Dennis Hastert. He was followed, last Monday, by the president's own press secretary,
Ari Fleischer, who put out a statement saying that Bush himself opposed this approach.
You can imagine how the bill's sponsors reacted. By Wednesday, Fleischer was out with a second,
conciliatory statement in which Bush lavishly praised Kolbe and Stenholm for their bipartisan efforts,
adding that the White House unfortunately cannot embrace every aspect of their legislation. When the
president is ducking his own proposal, something is seriously amiss.
Bush has also been the victim of unfortunate timing. During the 1990s, as sponsors trotted out
privatization schemes, the stock market was booming. Skeptics noted that markets could fall as well as
rise. Now, Wall Street has provided the exclamation point.
In fact, it would take a return to robust economic growth for the stock market to provide the gains that
advocates of privatization tout. But if high rates of economic growth return, then more tax revenues will
flow into Social Security accounts under the present system, and the much-exaggerated shortfall goes
Lately, Bush has been frantically trying to find legislative compromises with Democrats in order to
avoid outright defeats, as his Republican allies desert by the dozens. This may work with patients'
rights or Medicare drug benefits. But when it comes to Social Security privatization, Bush is locked in.
This is the president's very own political lemon.
Why was Bush so keen to pursue this approach, even at the risk of political isolation? One reason has
to do with generational politics, the other with Wall Street.
Social Security is our best-loved liberal program. Three generations of older voters, rich and poor alike,
have looked to Democrats to defend it. If privatization could introduce a wedge between more affluent
voters and less affluent ones, strategists calculated, that coalition would rupture. Bush's advisers also
hoped that younger voters, dazzled by rising stock prices, would be attracted to private accounts.
Further, the prospect of individual accounts, with fees in the tens of billions, would be a bonanza for
Wall Street. Sponsors also hoped that private stock purchases running into the trillions would bid up
stock prices again.
Despite all the hype, ordinary voters just aren't buying the idea. Government-guaranteed Social Security
remains very popular.
The pity is that there's a very good alternative to Bush's plan: Leave the current Social Security system
intact and add a new layer of private accounts. This, however, would require using some of the federal
budget surplus, the same one that Bush chose to squander in tax breaks for the upper brackets.
The supplemental account proposal, in fact, was floated last year - by a fellow named Gore - and it's far
from dead. When Bush's commission formally lays its egg later this year, we could have a very useful