December 10th, 2006

How We Lost Personal Accounts

Posted in  Entitlement Reform 
Author: Peter Ferrara || Location: Washington, DC, USA

In my last blog, I responded to those who called me a liar for reporting that the Bush Administration was planning a deal with the Democrats on Social Security including tax increases.  The response I got was, well, the tax increase is really an ok idea now.

So I guess I wasn’t a liar after all.

So now we need to understand how we got here, and whether the tax increase/personal account sellout plan is a good idea. We also need to focus on substance and stay away from the personal attacks and name calling.

For over two years, I have been arguing that President Bush needed to advance a reform plan focused solely on personal accounts and their many positives for working people, without benefit cuts or tax increases.  That is the formula that turned off the electricity to the third rail of American politics.  That is the formula that led to election victory after election victory on personal accounts.  That is how President Bush himself campaigned on personal accounts in 2000 and 2004.  This is the political model I developed for advancing personal accounts all the way back to the first book published by the Cato Institute in 1980.

Moreover, once you embrace moving the benefits from the public sector to the private sector through personal accounts, then you no longer need to talk about any benefit cuts.  Retirees in the future will be getting the benefits payable through the market savings and investment in the accounts, which should, in fact, be much higher than what non-invested, purely redistributive Social Security even promises, let alone what it can pay.  This is what enabled us to turn Social Security personal accounts into a populist, winning issue, and if we are going to have any chance of succeeding on this in the future then this is how we will advance them now.  For both political and substantive reasons, once you privatize the benefits, it no longer makes any sense to talk about cutting them.  They are no longer the government’s to cut.

I argued that if you wander into talking about cutting future promised benefits as well, you would lose the focus on personal accounts and all of their positives.  Indeed, the Left then argues that the benefit cuts are needed because of the personal accounts.  Moreover, the Democrats would respond by saying the long term SS deficit can’t be addressed through the benefit side alone.  There must be a balance between tax increases and benefit cuts.  I also argued that in order to get the Democrats to go along with this tax increase/benefit cut deal, Republicans would have to give up real personal accounts that substitute for part of the current system.

All of this has now played out exactly as I warned.  The Administration wandered into promoting large long term cuts in future promised benefits through so-called progressive price indexing.  The focus on personal accounts and their positives was soon lost, and now the central focus of the Administration’s reform plan is the price indexing instead.  The liberals and Democrats have responded that any such cuts in future promised benefits have to be balanced by tax increases.  And they have refused to even consider real personal accounts as part of the deal.  In abandoning the purely positive, populist approach, Bush lost the chance to go over the heads of the Democrat reactionaries directly to the grassroots, as Reagan did so successfully on issue after issue.

The badly confused White House staff generated the claim that Democrats would agree to go along with the President’s personal accounts if only we would support progressive price indexing.  They pressured many conservatives to support the benefit cut price indexing idea with this false claim.  The President even went on TV to announce his support.  But to this day not one Democrat has come out to support the personal accounts in return for such progressive price indexing.  The suggestion that Democrats would agree to personal accounts if only we would agree to large cuts in future promised Social Security benefits was always nuts, and this whole episode was a true scandal of extremely poor administration of the White House staff.

But it did get worse, much worse.  The White House staff actually got to the point where they were sending President Bush out to sell personal accounts across the country saying quite exactly that personal accounts would not solve the problem!  This has to be the dumbest communications faux pax in Presidential history.  If you don’t think the idea solves the problem, then just forget about it.  Don’t go out and campaign for it as the top domestic priority of your Administration.

By “the problem”, the staff meant the long term Social Security financing crisis.  But the Social Security problem rightly understood is so much more than this, and the personal accounts are the only way to solve the entire problem.  In particular, the personal accounts rightly designed shift so much of the program’s financial obligations to the accounts that the program is eventually left in permanent surplus through this process alone.  The Chief Actuary of Social Security has now scored about a half dozen personal account proposals with no benefit cuts or tax increases as achieving full solvency through precisely this process.  But the White House staff tasked with this issue never remotely understood any of this.

I saw Democrats who feared a Republican victory on this issue through personal account populism wince with embarrassment for us when they saw this complete intellectual collapse of the President.  By the time the President was done trying to promote personal accounts by late 2005, the polls still showed 50% to 60% of the public supporting personal accounts, down only about 10 points.  But when asked if they supported “the President’s plan” on Social Security, support dropped by half, to 25% to 30%.  This was the result of the brilliant White House staff work on Social Security.

In the next blog I will discuss why the tax increase/personal sellout plan now on the table should be opposed by conservatives and Republicans, not supported.