With the stock market in turmoil due to the various corporate accounting scandals, the idea advocated by President Bush of even partially privatizing Social Security has receded into the middle distance of political possibility.
Since January, the Dow Jones Industrial Average has declined by almost 20 percent and the tech-laden NASDAQ index by about 30 percent. CNN's Mark Shields predicted that the eight words we won't hear this year are "now is the time to privatize Social Security." Indeed, Republicans are quickly backing way from the Bush plan as Republican Congressional Campaign Committee Chairman Tom Davis of Virginia has flatly stated that no Social Security reform plan will even be discussed until 2003, thus effectively killing the Bush proposal for now.
But there is an alternative that both parties could likely support, which would offer the growth provided by the market plus preserve the safety net. Here is an idea that can help make Social Security and Medi-Care solvent for the next century, create new jobs, reduce class conflict, help erode the gender gap, lessen the need for future payroll tax increases, make whatever party that gets the credit for it a semi-permanent majority, create a potential gold mine that can be tapped in a national emergency and pay back younger workers for supporting the retirement of the "Baby Boom" generation. And if we're lucky, it will eventually abolish poverty in America.
It has been well known in both government and financial circles that the Social Security system is facing severe fiscal and demographic problems this century. The White House's Web site says: "Social Security's spending path is unsustainable in the long run, driven largely by demographic trends." When the program was first established in 1935, there were over 40 workers for every retiree. By 1960, the worker-beneficiary ratio was down to 5-1 and is 3-1 today.
When the largest generation begins to retire in the coming decade -- Baby Boomers, at roughly 75 million strong -- the ratio will be down to 2-1. Under such circumstances, the only options will be to either raise payroll taxes by 50 percent (roughly $150 per month for the average family), cut benefits by about one-third or some combination of both.
Because the elderly are 25-30 percent of all voters, cutting Social Security has been called the "third rail" of American politics: touch it and you die. (The elderly are also concentrated in key states like Florida, Pennsylvania and Ohio). On the other hand, tax increases helped speed up the demise of Lyndon Johnson, Jimmy Carter, & the first President Bush and cost the Democrats control of Congress under Bill Clinton. Hence the spectacularly unattractive options and the search for new ideas.
At the 2000 Republican Convention, George W. Bush outlined a plan to reform Social Security by allowing individuals to take one-third of their payroll tax of roughly 8 percent and invest in the stocks of their choice. The idea is that stocks would pay a much higher return than the 2-3 percent guaranteed by the government and thus taking pressure off Social Security and Medicare.
Despite Al Gore's denunciation of this proposed Social Security reform as a "risky scheme," Bush carried many states with the highest ratios of senior citizens (Florida, Ohio, Arizona, Arkansas, etc.), doing particularly well with elderly in Western Florida.
In the first six months of the Bush presidency, tax cuts were given the highest priority. The administration was starting to promote its pension reform ideas last summer, but Congress hadn't yet begun to consider them in earnest. Needless to say, any Social Security reform has been moved to the backburner by the war on terrorism.
While the concept of higher returns saving the pension system is a good one, the Enron and WorldCom debacles where thousands of Americans lost their life savings makes enactment of the Bush plan unlikely for the foreseeable future. The Bush team in undeniably right that the nation needs to generate vast sums to pay for the retirement of Baby Boomers and successive generations.
But the hard fact is that some retirees will choose bad investments and almost certainly come back to the government for help. Since the elderly have the highest voter turnout, it will be virtually impossible for politicians to ignore their pleas for help. Social Security's main virtue is that it will always be there.
However, there is fortunately a way to combine both the allure of higher returns and the guaranteed safety net of Social Security -- one that would not require diverting current payroll taxes (needed, in any event, to pay benefits for current retirees). Moreover, it would keep benefits stable.
In exchange for providing the decisive vote for Bill Clinton's first budget in 1993, Nebraska Sen. Bob Kerrey was appointed to chair a bipartisan-partisan commission to study the problems of Social Security and Medi-Care. The commission quickly discovered that both programs were facing fiscal problems in the early 21st century.
For example, by 2041, Social Security will be able to pay only $75 of each $100 of entitlements from revenues collected by the payroll tax. As a result, the Kerrey commission recommended a mixture of spending cuts and revenue increases to save both Social Security and Medi-Care. Out of his work on the commission, Sen. Kerrey teamed with former New York Sen. Daniel Patrick Moynihan to think up new ways to fund the retirement of the massive "Baby Boom" generation born after World War II.
Senator Kerrey was willing to consider what the Bush campaign eventually endorsed. However, one key part of Sen. Kerrey's reform was to have the government buy every American baby a $1,000.00 Individual Retirement Account that would gather interest tax-free until the age of 59 and a half. (Since roughly 4 million American children are born every year, the program would cost about $4 billion per year).
This IRA would buy each American child an "index fund" of stocks, most likely the Dow Jones 30 top industrial stocks or the Standard & Poors 500 largest companies. (The Dow would be a good choice because its companies tend to be diversified across the financial, industrial, entertainment and "high tech" fields. The S & P 500 is even more diverse, but much more volatile over the long run).
In the 20th Century, stocks averaged an 11 percent annual return. Over a nearly 60 year timeframe, this IRA would provide nearly $500,000.00 for each beneficiary's retirement. The worst 60-year timeframe included the Stock Market Crash of 1929 and the Great Depression. Stocks averaged about 8 percent annually during this time, leaving a benefit of about $120,000.00, still highly respectable. Over the last 30 years, the Dow has averaged a 12.5 percent annual return and consistently been the safest investment among stocks. ($1,000 growing at 12.5 percent annually for the last three decades would yield a harvest of $34,000, a 34-1 return. For 60 years at 12.5 percent, the benefit would be over $1.1 million). In the 1980s and 1990s, the Dow averaged an 18 percent annual return. Such a performance would give each beneficiary the astonishing total of over $20 million in 60 years! (Like Rubic's Cube, we can plug in different time frames & interest rates and come up with a zillion different results).
It's very unlikely that the "Bull Market" performance of the past two decades can be repeated. But using the 20th Century average still guarantees every retiree enough to live on and will eliminate the need to either raise payroll taxes or cut benefits. Such a supplement to Social Security and pensions would guarantee any middle income person a prosperous retirement.
In which case, Social Security benefits (and payroll taxes) would never have to be increased again. It would also help supplement Medi-Care by allowing recipients to be able to afford private medical insurance to cover whatever Medi-Care didn't. It was a great idea, but was sidetracked in the mid-1990s by big deficits and later by the Clinton impeachment drama.
There is solid precedence for this concept working. In a 1985 Commentary Magazine symposium on social policy, Moynihan noted that both increasing Social Security benefits and indexing them for inflation had drove the poverty rate for senior citizens down to less than 10 percent. By contrast, nearly a third of all American children in 1985 grew up below the poverty line. Indeed, Moynihan commented that if Kerrey's ideas really worked, all those working class Democrats would become rich and likely end up voting Republican. (Just as the unemployed of the 1930s became the middle class Nixon-Reagan Democrats a generation later).
Kerrey proposed to start this program for current newborns. The deficit really took off in 1980 to pay for a new defense buildup in response to the Soviet invasion of Afghanistan, growing from $80 billion in 1980 to nearly $300 billion in 1992. Five years into the Clinton administration, the deficits turned into big surpluses with the help of the Republican Congress. (To be sure, the war and the recession have plunged the government back into debt yet again).
Since the children born in the 1980s and 1990s will get stuck paying off the deficits run up under Presidents Carter, Reagan and Bush I, this program will be a payback to them. Also, demographic reality indicates that the payroll taxes of workers born after 1960 will go to fund the retirement of those born before 1961. Therefore, I propose extending this program to children born after January 1, 1980. If possible, I'd even extend it back to kids born in 1961 because that's when the first peacetime run of consistent deficit spending began. (I was born in 1960 and would not benefit).
The retroactive IRAs would grow from the moment of purchase. Obviously, younger people will have the advantage of a much longer time horizon for their IRA to grow, but no program is perfect.
How might this program eventually create other side benefits? Let us count the ways:
Investment/Job creation: The program's initial $100 billion shot into stock market -- plus its annual $4 billion purchases -- will bid up prices, invest in new companies and eventually create more jobs.
The end of class warfare: Since their invention 30 years ago, exit polls have always shown that the wealthiest voters are the most Republican. If everyone gets a big financial windfall 20 to 60 years from now, class conflict will be on the way out.
No new taxes: The "No-new-taxes" pledge has been conservative orthodoxy since the 1950s. However, this new money could be tapped in a future national emergency. It'll drive anti-tax zealots like Bob Novak crazy, but this will create a huge reservoir of accessible cash for the government, if need be. In case of such an emergency, these IRAs could either be taxed or temporarily diverted into the general fund.
Realignment: We can safely predict that the incumbent party will make sure their President's name is on quarterly statements that are continually increasing in value. If any party can claim most of the credit for this program when it succeeds, it will be on its way to dominating American politics.
Closing the Gender Gap: In 2000, Bush lost the women's vote and it cost him the popular vote. One reason was that older single women tend to be poorest and like the safety net. The Bushies could reverse the gender gap and promote family values with this idea. If they want to be really clever, the Bush administration would argue that since women are much more likely to interrupt their career to take care of children, some women won't work outside the home at all, some women will earn less due to job discrimination, some women will become "tragically widowed at an earlier age," they should get special consideration. Therefore, the Bushies will buy every American female a $2,000.00 IRA (twice as large as for males). I have no idea whether the Supreme Court would allow this, but Bush could claim no better feminist credentials than this idea.
Ending poverty: If the market ever consistently generates the 20 percent gains of the 1990s again, grandparents of the 21st century will be able to share a million-dollar bounty with their descendants.
Albert Einstein once called compound interest "the most powerful force in the universe." Therefore, let the market and the magic of compound interest do the heavy lifting to save our pension system in the long run.
Michigan Senator Phil Hart once told Ted Kennedy that the surest way to pass a bill was to share credit for it. To help the program pass, I'll even favor calling it a "Reagan-Bush-Kerrey" IRA.
Is there any downside to this idea? As noted above, no plan is perfect. The biggest problem is the initial cost of over $80 billion (the cost of $1,000 IRAs for all Americans born since 1961 plus $4-5 billion annually for newborns). And the program will face the perennial desires for instant gratification: people always want things now. We could go through an unexpectedly long slump in the stock market, thus making the eventual payout much less than expected. But any proceeds would help supplement Social Security.
Could there be any unintended consequences? Real estate prices in desirable climates will go through the roof, but that will likely happen anyway. Some recipients will dissipate their assets on gambling and/or intoxicants. Con artists will relieve some others of their benefits. Some grandparents may be prevailed upon to generously (and perhaps foolishly) bail out struggling children and grandchildren. But the vast majority of 60-year-olds will use their new money wisely. And even those who go through their benefits too quickly will still have Social Security to fall back on.
So what are we left with? A program that will save the retirement system, promote savings and investment, reduce class conflict and help the poor. What's not to like?
For this program to pass will require both vision and patience in massive supply. Does that spirit of sacrifice still exist? We should all hope so.
Patrick Reddy serves as a consultant to California's Assembly Democrats.
