The Great Social Security Scare!
The Al Gore demagogues are out in force.


Larry Kudlow

The Al Gore Democrats are out there running with the usual last-minute, pre-election, demagogic scare tactic that George Bush will bankrupt the Social Security system and deprive seniors of their benefits. Not just Gore, but Treasury secretary Lawrence Summers has taken up the mantra that Bush’s plan to reform Social Security through the option of personal retirement accounts for private-market stock and bond investments will somehow rob the trust fund of $1 trillion.

Normally, key Cabinet officers such as the secretaries of Treasury, Defense, and State stay out of election-year politics. But Summers has chosen to curry favor with Gore by abusing his office.

And then there are fellow travelers such as liberal economist Paul Krugman and left-wing propagandist Michael Kinsley who are piling on Bush’s plan.

All this is an act of desperation as polls show Gov. Bush with an expanding lead.

Battleground 2000 pollster Ed Goeas acknowledges that seniors are undecided in the battleground states. But he quickly adds that his most recent survey shows that even while blacks are coming home to the Democratic party, and union-member intensity is picking up, Bush still has a 51-44 lead in the tracking poll coming out tomorrow.

But let’s talk about Social Security for a moment.

The Gore/Summers argument is completely without merit. First, no one knows where this $1 trillion number comes from. Bush has never specified the details of his Social Security reform. That said, even if there were a $1 trillion cost to personal retirement accounts over 10 years, Bush has all along asserted that these resources will be taken out of Social Security surpluses, estimated at roughly $2.5 trillion over the next 10 years. That is, each year, after all benefits are paid, a fraction of the excess of payroll-tax revenues will be allocated to personal retirement accounts for those younger workers who choose this option.

Let me reiterate: PRAs will be funded by the surplus of revenues after benefits have been paid. Each year.

Now, what’s really going on here is a policy priority decision made by Bush to send surpluses back to the people who earned them in the first place. Rather than use every surplus dollar to pay down Treasury debt held by the public, Bush would turn some of the surpluses back to taxpayers.

Here’s another important point: Gore and company keep talking about a Social Security lockbox. This is a fiction. It is a myth. There is no lockbox. Every nickel of Social Security surpluses must, by law, be turned over to the Treasury department in exchange for a non-marketable Treasury note, or IOU, with a designated interest payment. Of course, this is just a record-keeping transaction. Ultimately, the U.S. government is liable for all Social Security payments, so this internal transaction is merely for bookkeeping purposes.

The point, however, is that there is no lockbox; the Social Security system is not a vested pension fund, it’s a yearly transfer payment.

Now, Gore stipulates that Social Security surpluses will be “locked up” by using 100% of them for debt-retirement purposes. But locked up is completely different than lockbox. By paying down the marketable Treasury debt at a slower pace, Bush is essentially doing the same thing as Gore, but with the added policy priority that some of the on-budget and off-budget Social Security surpluses will be turned back to the taxpayer in the form of tax cuts and personal retirement accounts. Bush is still paying down debt, but at a slower rate. Meanwhile, he is returning part of the surpluses back to those who earned them in the first place. In this way, the Texas governor chooses to empower people and limit government.

Importantly, Bush’s use of surpluses for tax cuts and retirement accounts will grow the economy at a faster rate in the next 10 years through the incentive effects of added capital formation and productivity. In other words, Bush will expand the economic pie for everyone, including current and future Social Security recipients. Gore, on the other hand, will hold back economic growth by enlarging the government’s share of economic resources.

Ironically, it is Bush’s personal-retirement-account proposal that creates the first real lockbox in Social Security history. People who choose the PRA approach will actually own an asset. And that asset’s value will grow at the compounded rates thrown off by private-investment markets. In rough terms, this asset will yield 6-8% compounded over the next 30 years, compared to a less-than 2% rate of return from Social Security.

Meanwhile, should private-retirement-account owners pass away, their personal retirement account, which is part of their estate, can be passed along to spouses or heirs. They truly own the asset. Under current Social Security law, however, it is the Social Security Administration that owns the asset. And therefore, hard-earned payroll taxes are given over to the U.S. government, rather than families.

I don’t know about all of the Al Gore Democrats who are pushing this last-minute desperation attack on Bush. But surely Treasury Secretary Summers, who is a smart guy, knows how the accounting game is played. Surely he knows that the so-called $1 trillion does not evaporate into thin air. Nor through the magic of fiber-optic communication does it move at the speed of light to another planet. The issue has always been a matter of policy priority. Gore wants to keep the money for government, Bush wants to send some of it back to the private earners. Bush’s plan will promote capital formation and economic growth, while the putative regulator-in-chief will slow America’s prosperity rate with government’s heavy hand.

Certainly, at the level of rhetoric, if not merely the level of detail, the whole Social Security issue is fiendishly complex. So it’s easy to demagogue this issue. Fortunately, information-age Americans seem to have a better grasp of Bush’s reform plan than his Democratic detractors do. Other than the seniors’ population, Bush’s plan is receiving high favorables–especially among the younger likely voters. Not only does his innovative plan speak well as an economic-growth policy that will generate enormous retirement wealth, but it also speaks volumes about Bush’s strong character and his leadership capabilities that he would tackle the proverbial third rail of American politics.

Whether it’s Social Security reform, or pro-market consumer choice for education and health-care reform, Bush has been unflinching in his commitment to the application of conservative, free-market principles.

Bush-campaign insiders tell me that later this week the governor is going to give a very tough speech criticizing the petulant immaturity of the Al Gore scare tactics and demagoguery. Bush will argue that Gore is committed to the liberal status quo of big government — but the Texan will also argue that no amount of last minute scare mongering will deter him from sticking to his new economy, free-market reform agenda.

Nations all over the world, in Europe, South American, and Asia, have been moving towards private-investment market reform of state retirement systems. Over time, market funding will replace government funding, and as economies grow, more than enough surplus resources will be generated to meet retirement needs and health care needs. Al Gore wants to keep the liberal welfare-state status quo. He will resort to any tactic to do so. But liberalism is a loser and so is Mr. Gore.


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