eorge W. Bush’s promise to nudge Social Security in a free-market direction will be the most important policy issue in this year’s election. More than any other issue, it will determine who wins the White House. And that’s just for starters. Bush’s proposal has the potential to alter the course of American politics for decades to come.

How could it be otherwise? Social Security is the federal government’s largest program. Receiving a check from the program is the principal interaction 40 million Americans have with the federal government. For millions more, the mailing of those checks is one of the few things the federal government does that make them view it positively. It is, symbolically, what’s left of the New Deal. Agriculture subsidies and welfare were drastically overhauled in 1996, and only a small part of the country cares about the Tennessee Valley Authority.

What Bush is saying is that this relic is no longer sacrosanct. All of the other institutions that were suitable to mid-century America have had to adapt to today’s more individualistic, decentralizing culture: the phone companies, the media, the academy, the churches, even the military. Bureaucracy is in retreat almost everywhere, and Social Security is no exception.

That’s not the way it looked when the program was born, of course. Social Security was a response not only to the economic crisis of the 1930s, but to an economic order that threatened cherished American values. After decades of industrialization, the fiction that we were a country of self-reliant yeoman farmers could no longer be sustained. Labor and capital had become two distinct classes. Most Americans worked for others, their livelihoods dependent on vast impersonal forces they could not control or even understand.

Political scientist Charles Kesler summarizes the argument that prevailed in the ’30s: “Given the insecurity built into the modern economy, government had to provide social security to save the middle-class basis of American democracy. Since people could no longer independently save for their old age, the government had to help them to do this in order to lift them to freedom.” By framing the issue this way, FDR was able to sell government pensions — a policy idea imported from Europe’s emergent social democracies — as an outgrowth of our best political traditions. FDR also had to resort to some deception, presenting a mild program of redistribution as though it were a form of insurance (a deception that continues to this day in Democratic criticisms of Bush).

It was through expedients such as these that FDR got credit from historians for “saving capitalism” by tempering its excesses. Class conflict between capital and labor remained a muted theme of American politics, but it never became virulent. At the same time, dependence on the state increased. The inventor of government pensions, Chancellor Bismarck, explicitly sought this effect: “Whoever has a pension for his old age is . . . far easier to handle,” he said, having become the equivalent of “a servant in the chancellery or at court.” In America’s more democratic circumstances, the chief political effect of Social Security was to increase popular support for the party of government.

There was, however, an alternative method of solving the labor–capital problem that had attracted interest from thoughtful businessmen from the dawn of the industrial revolution: making the laborer an owner of capital himself. Albert Gallatin, Jefferson’s treasury secretary, implemented the first profit-sharing plan ever at his glass works in New Geneva, Pa., arguing that the “democratic principle upon which this Nation was founded . . . should be applied to the industrial process.” The president of Sears, Roebuck and Co. testified to the Senate in 1939 that profit sharing “helps to avoid labor unrest and strikes, and gives the employee a feeling of greater security and unity of interest with the employer.”

The profit-sharing strategy failed because its efficacy depended too much on the success of particular companies. Over the past two decades, however, worker capitalism has taken off as employees have gained access to capital markets generally, through mutual funds and “defined contribution” corporate pension plans. (In a defined-contribution plan, workers have a large say in the management of their accounts. In “defined benefit” plans, which used to be the norm, employers managed the accounts and promised workers a benefit based on their wage and length of service to the company.) While fewer than a fifth of American households owned stock 20 years ago, today slightly more than half do, either directly or through their pension plans.

In “The Rise of Worker Capitalism,” a paper for the Cato Institute, Richard Nadler has surveyed the research on how this stockholding revolution has affected workers’ attitudes. He finds that it has made them more interested in saving for the future, more productive, happier on the job, more committed to their companies, and less likely to strike or quit. They are also more likely to be reading the same business publications as their CEOs.

Reform of Social Security is conceivable now because the historic tension between capital and labor is beginning to dissolve. Increasing numbers of Americans have confidence that they can manage their own money. They know that wealth accumulation can provide them with more retirement security than income transfers can. They know too that the risks of investment can be reduced in various ways and must in any case be set against the political risks that affect Social Security. Unsurprisingly, stockowners are more likely than non-owners to support Bush’s proposal.

This last fact suggests something important about the political dynamic of Social Security reform. Social Security has grown over the years for the usual reasons programs grow: The more beneficiaries there are, the larger the constituency for the program; and the bigger the benefit, the greater that constituency’s fervor. Private accounts would work the same way, but in reverse. If the government were to let workers invest 2 of the 12 percent of their wages that go to Social Security, almost the whole adult population would be made of investors. Over time, public pressure to let workers invest 3 percent — then 4, then more — would be irresistible.

Opponents of reform have darkly suggested that private accounts, if introduced on a small scale, will eventually completely replace Social Security. They are quite correct, though they are wrong to see this as a Wall Street plot.

Just as Social Security altered public attitudes toward the federal government as a whole, so would universal worker capitalism affect political psychology. Social Security made large-scale income transfers directed by the federal government a matter of routine. The number of groups demanding such transfers naturally proliferated.

Bush-style reform of Social Security could make routine the idea that people should be allowed to save their own money to accomplish important social purposes. People invest primarily to provide for their retirement, but also to finance their children’s education and to cover unforeseen medical expenses. Why shouldn’t people be allowed to save for these purposes without facing multiple layers of taxation? Why, for that matter, should any savings be subject to multiple taxation? In a nation of investors, such questions are going to be hard to answer. That’s why reform of Social Security would almost certainly lead to reform of Medicare and of the tax code as well. (Thomas Saving, a felicitously named economist at Texas A&M, has already designed an investment-based solution for Medicare that has attracted interest from conservatives on Capitol Hill.)

The rise of the new investor class has already led to more capital-friendly policies. In 1989, President Bush was unable to secure a cut in the capital-gains tax even though it was one of his highest priorities. In 1997, a cut passed easily, with bipartisan support and not much debate. The major difference: More than 25 million Americans had entered the stock market in the interim. Their view of capital-gains taxes had changed. Can there be any doubt that their view of corporate taxes will change too?

In worker-capitalist America, successful businessmen will no longer be objects of suspicion but quasi-heroic celebrities. The polls in the Microsoft case have consistently shown public admiration for Bill Gates and hostility to the Justice Department’s lawsuit against the company. In John Zogby’s poll, only 17 percent of the public favors the department’s proposal for a breakup of the company. Says libertarian activist Grover Norquist: “The Roosevelt-Taft attacks on the steel companies would not have survived in investor America.” Nadler’s Republican Ideas Political Committee is testing the effect of ads on how the Clinton administration’s hundreds of lawsuits against corporations affect investors.

The shift toward free-market attitudes brought about by worker capitalism can be analyzed in terms of a field of economics called “public choice.” Public-choice scholars look for structural explanations for why the political economy of the welfare state routinely generates irrational public policies. In many cases, they conclude, the problem is that the benefits of such policies are highly visible and concentrated in the hands of a few people who are therefore well organized to defend the policies, while the costs are disguised and dispersed so far and wide as to be practically invisible to those who pay them. Protectionism, for instance, rarely helps the protected industry as much as it hurts consumers and other industries. But even though the costs outweigh the benefits, the distribution of costs and benefits tilts politics in favor of unsound policy.

The problem fades if special interests can be subordinated to some more all-encompassing interest. One way to do this, sought by activists such as Norquist, is to require supermajorities to enact any redistributive policies. Another is to create a massive constituency with a direct interest in the economy as a whole, and thus in sound economic policy. That is what worker capitalism does. When most people have a capital stake in the economy, it isn’t necessary to make speculative arguments to persuade them to oppose bad policies; pointing to their bottom lines will suffice.

Conservatives, especially social conservatives, have been slow to appreciate the advantages that the democratization of capital ownership offers them. Some, like Gary Bauer, cling to a Buchananite model of the politics of labor that is, as Nadler remarks, “ideologically leftist and demographically obsolete.” More commonly, they are so intent on disparaging Clinton that they disparage as well the rising Dow that has occurred on his watch. So what if the Dow is rising, they ask, if our popular culture has gotten filthier? But it has to help conservatives of all stripes if capital ownership makes people think harder about the long-term consequences of their actions and about the behavioral conditions of individual success. Moral dissolution and wealth accumulation are not a natural fit.

Democrats and union leaders have much greater reason to fear worker capitalism. Workers will rely more and more on what Bush calls “the security of ownership” and less and less on their ostensible protection. The Democratic party and the unions could well survive the transition and perhaps even prosper, but doubtless only as very different — and more market-oriented — institutions. It will certainly be fun watching them try to adapt.

Instead of a radical transformation of Social Security, Gov. Bush has prudently decided to approach reform incrementally. His proposal is no less important for that. If enacted, it would put within reach many conservative goals for America that can now scarcely be conceived of. His Social Security plan, all by itself, is reason enough to elect him.