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W.’S Muscular Social Security Plan
This is 21st-century breakthrough stuff.


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Larry Kudlow

Way back in time, during the early months of the Reagan Administration, a number of the Gipper’s more libertarian economic advisers wanted to trash the New Deal — especially Social Security — by severely rolling back benefits in order to shrink government and curb the budget deficit. Wisely, President Reagan always rejected this approach. Time and again, he reminded his staff that he himself voted for FDR four times and went on to vote for Truman. Throughout the budget arguments, Reagan insisted on invoking and preserving the so-called social safety net.

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Yes, he intended to radically transform the economic landscape by slashing marginal tax rates and putting an end to double-digit inflation. And yes, he worked hard to slow domestic spending. But he steadfastly refused to rip large holes through the New Deal/Great Society safety net, believing that these programs were an integral part of the fabric of American life. What’s so interesting to me about George W. Bush’s freshly minted Social Security reform plan that provides for individual-retirement-account-investing in the stock market — set forth in a speech today in California — is that he makes it clear that he intends to strengthen and save Social Security, not to destroy it. This is smart Reagan-style politics.

“America made this commitment almost exactly 65 years ago — in August of 1935…Sixty-five years later, we can declare: Social Security is the single-most successful government program in American history….When I am elected, this generation and this president will save Social Security.”

This is exactly the right political approach to Bush’s far-reaching plan. As the Texas governor notes in his speech, for eight years the Clinton/Gore administration has failed to act. Bush is now ready to provide leadership. And cleverly, Bush time and again invokes the support of Sen. Bob Kerrey and other moderate Democrats such as Sens. Moynihan and Breaux and Rep. Stenholm, all of whom favor the use of private investment accounts. What’s more, Bush undoubtedly knows that Rasmussen polling data show that 60% of American workers would drop out of Social Security in order to invest privately if they could, and that 80% of American workers now believe that investing their own money will give them more for retirement.

So the Texan is covering his political bases in anticipation of the usual Al-Gore-Terminator-3-cut-and-slash response. He’s almost daring Gore to tell voters how risky and irresponsible this plan will really be, especially since Gore owns stocks and is enrolled in the Federal Thrift Savings Plan that offers personal accounts. More smart politics from Bush.

There’s an enormous contrast developing between Bush and Gore. The former is coming across as thoughtful, careful, and caring, in touch with modern American concerns, as he develops new policies on taxes, education, health and retirement. The latter is developing a hip-shooting, attack-dog image that smacks of pessimism, negativism, and status quo stand-patism. While Bush is bringing conservative ideas into the mainstream, Gore is positioning himself as an Old Democrat, significantly to the left of Bill Clinton. That is why the aggregate of all polls now shows Bush with a solid 8-9 percentage-point lead that, on paper, gives him the necessary 270 electoral votes to win the presidency.

Stock markets roared approval at the Bush Social Security speech, rallying by 2% despite the continued threat from Federal Reserve interest rate hikes. The plan is still a bit short on details, but at this point policy vision is more important than number crunching. More than likely, however, the plan will permit 2% of payroll-tax contributions to be invested in a government-approved basket of investment funds. At the same time, Bush will maintain a Social Security benefits safety net, lest the new investments not pay off. He also insists that the payroll tax will not be raised.

Additionally, he argues that while Al Gore “trusts government to manage our retirement, I trust Americans to make their own decisions and manage their own money.”

Bush asserts that “American securities markets, over time, have been among the most reliable investments in the world.” Though Al Gore may deny it, this is absolutely true. The historical-empirical research compiled by Roger Ibbotson of Yale and Jeremy Siegel of the University of Pennsylvania shows this to be the case. Going back to 1926 in Ibbotson’s research, and 1802 in Siegel’s work, the U.S. stock market has thrown off a 7% inflation-adjusted annual rate of return (10% with inflation) through good and bad economic times. Interestingly, their studies also show that stocks outperform Treasury bonds by an average of more than 3 percentage points.

So let’s take an average income earner who makes $35,000 a year. His or her 6% Social Security contribution would be roughly $2,100. Two percent per year would therefore be about $700 a year to invest in private markets. Starting at age 25, if this money were invested in a market basket of stocks and bonds returning 8% per year, this would accumulate to nearly $200,000 at retirement age. If the money were invested in large-cap stock funds yielding 11% per year, the cumulative gain would be over $400,000. Not only would this enrich the individual retiree, it would also vastly reduce the required benefit amount payable by the Social Security trust fund. So it’s win-win. The investor retires comfortably, while the contingent liabilities of the trust fund are reduced substantially.

The 50% of Americans — and the two-thirds of all voters — who are already invested, know this. But George W. Bush is the first presidential candidate to propose it as policy. Give him credit. Enormous credit. This is 21st Century breakthrough stuff.

Now there’s one argument Bush will need to make that he didn’t mention in his speech. Namely, he must point out why across-the-board tax cuts, which will be funded by the superabundance of non-Social Security surpluses, will also strengthen the Social Security system. He needs to emphasize that tax cuts will expand the economy, generating more saving and investment which will, in turn, raise worker productivity. Over the next two decades, the economic goal is to make two future workers as productive as three of today’s workers. Then the worker-beneficiary ratio will stabilize and continue funding the Social Security system as an ongoing safety net, while the transition to private investment accounts is completed.

There’s another argument Bush will have to contend with. Gore will attack him on the numbers. Some studies show that over the next ten years the move to personal retirement accounts will cost about $1 trillion. I never put much stock in these static revenue estimates, which are not really worth the paper they’re printed on. But whatever the numerical case, the important point is that a President Bush will have substantially more surplus resources than current government estimates predict.

Between 1947 and 1999, a period which included nine recessions, yearly economic growth in the U.S. averaged 3.5%. Drawing from the Congressional Budget Office figures, Bush is assuming only 2.7% real economic growth over the next ten years. If the American economy, however, performs in the future as it has in the past (this doesn’t even count the growth dividends from the new technology economy or supply-side tax cuts), then the cumulative budget surplus by 2010 could be $9.2 trillion instead of $3.3 trillion. Of this larger amount, $2.8 trillion would accrue from non-Social-Security on-budget operations, with an incredible $6.4 trillion of Social Security surpluses. In other words, plenty of money for tax cuts, plenty of money for private retirement accounts, and plenty left over for some rainy-day spending on education and prescription drugs. Or whatever it takes to win this election.



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