Social Security, Post-911
Where reform fits in.

By Peter Ferrara, an associate professor of law at the George Mason University School of Law and a senior policy adviser to Americans for Tax Reform.
October 18, 2001 9:50 a.m.

bviously, the attack on the U.S. on September 11 moved the public focus away from domestic-policy issues, to a virtually exclusive concern with the war effort. But the trends spawned by that attack only greatly increase the long term prospects for fundamental reform of Social Security involving a personal-account option.

Long-Term Prospects for Reform.

The most important long-term political effect is that the stature and political clout of President Bush has been enormously enhanced. Consequently, when the war effort settles down, and the nation returns to domestic priorities, the president will be extremely effective in promoting a personal-account option.

Indeed, as a highly successful, war-time president who has etched a major profile in U.S. history, Bush will be able to take the message of Social Security reform to new constituencies who will grant him a hearing they would never have considered before. As a result, the president will be able to speak credibly on the issue to union members, African Americans, and other liberal/left groups. This opening is so momentous because there is such a powerful case that can be made to these groups regarding the enormous benefits of personal accounts for them. This raises a realistic prospect for an ideologically and politically broad-based coalition to emerge in favor of personal accounts. That, in turn, would surely lead to quick passage of personal-account reform, as discussed further below.

But there is a less obvious but highly important secondary political effect as well. The divisive, attack-dog, smear-campaign strategy of the Left in opposing such reform has been shattered. They quite clearly will not be able to personally attack the president over the issue. Nor will the public be open to demagogic attacks on "Wall Street," "the rich," or other targets of the Left-wing bully-boys. The public instead will be in a mood for inclusive arguments about benefits for all Americans, which is precisely what is involved in the case for personal accounts.

Moreover, seniors will be in a patriotic mood and more open to hearing about changes that will benefit the country while not hurting their benefits. They will be far less inclined to listen to the fundamental, foolish arguments of opponents that this is all somehow a plot by the president to deprive them of their benefits.

At the same time, the hearty survival and now rebound of the capital markets also further strengthens the case for reform. It took just a few weeks for investment markets to absorb this mighty blow before mostly returning to the levels achieved before the attack. Long-term personal-retirement account investors would simply have reaped bargains continuing their regular investments during this period.

What is the Long Term?

But just how long term is this prospect for reform? When will the public attention return to top-priority domestic issues, allowing the Social Security reform process to continue?

Domestic priorities will not have to wait until a final and total victory over terrorism has been won. A focus on true domestic priorities will start to return when the high-profile military action ends and the whole terrorism matter settles down into some sort of watchful and defensive routine.

As of this writing, the Taliban government in Afghanistan has all but fallen. Before the end of the year, a friendly regime will have been established there that will cooperate in rooting out terrorist forces in that country. Then the issue merely becomes hunting outlaws in the hills. Here is a prediction: We will ultimately find that U.S. and British special forces are much better hill fighters and guerrillas than the comparatively rag-tag, poorly trained, poorly equipped bully-boys of the much ballyhooed terrorist network.

The key question is whether this war effort moves on to seek removal of another pro-terrorist government, such as Saddam Hussein's regime in Iraq. If not, then the president will be able to restore momentum on his domestic agenda in the State of the Union speech next January.

If the battle moves on to fight other Mafia-style, terrorist-harboring regimes in the Middle East, that fight will again be quicker than is now generally recognized. The brutal fact is that none of the other possible target regimes have much military punch to resist the U.S. Saddam is the only one who could put up a fight, and he is without the extensive forces we took out in just a few weeks ten years ago.

The truth is, when defeat is inevitable, as it is for any pro-terrorist regime we may now target, resistance crumbles quickly. Who wants to die in a lost cause? As a result, the prediction here is that any major military action will be over by the end of next year in any event, and probably before the end of the summer.

Undoubtedly, the terrorist network will try to sponsor further attacks on the U.S. as the military battles unfold. The public is now rightly quite deeply concerned about the anthrax scare. But step back for a minute. If all they can muster is a few letters laced with anthrax, quite treatable with antibiotics, that is a feeble response to the wholesale destruction of the terror network that is currently proceeding.

Deprived of all state sponsorship, as they will be shortly, the terror network will be far weaker. With action taken against their assets, and the greatly heightened state of alert against their possible attacks, a manageable measure of security may be achieved sooner than is now commonly thought.

As a result, even with a second wave of U.S. assaults against one or more other regimes, on this analysis we can expect a return to the top domestic issues no later than the 2003 State of the Union address following the next congressional elections. That will probably be an ideal time for a victorious president to renew his domestic agenda.

Spending the Surplus.

The major substantive implication of the Sept. 11 attack is that the federal government is now spending most if not all of the Social Security surplus, as well as any additional general budget surplus. The weakened economy has further depleted these surpluses and may even produce deficits. Yet, the administration was planning on using these surpluses to finance personal-account reform.

But the war related expenditures, both for the rebuilding and for the fighting, are temporary items that will not continue over the long run. Once the antiterror effort settles down into a long-term routine, and the major military action is over, the spending will phase down as well.

The Social Security surpluses will then return. At that point, the administration should reprioritize general spending restraint as well. That along with Bush's primarily tax-cutting economic-revival program will lead the economy to come roaring back and produce general budget surpluses once again. These surpluses can then also be devoted to Social Security reform.

Of course, surpluses are not needed for personal-account reform. When the Cato Institute's first book on Social Security privatization was published in 1980, both Social Security and the general budget were in deficit, with no expectation that this would change soon absent reform. Indeed, Chile adopted Social Security personal accounts with its system in deep long-term deficit. The transition can be financed with general spending restraint, short-term issuance of government bonds, and the revenue reflow resulting from increased saving and investment, among other sources.

An Action Agenda for Reformers.

With sharply improved but delayed prospects for reform, the key question is what do reformers do now. The public is not going to be ready for conferences, town halls and other public events for the rest of this year. But there are 2 other urgent priority areas on which reformers should now focus.

The first is to reach across the ideological and partisan divide and make the case for a personal-account option to liberal/Left constituencies and Democrats. Reformers should aggressively seek out leaders of labor unions, the African-American community, Hispanic organizations, women's groups, and Democrats generally to make the pitch that was made in the last memo in this series and before — personal Social Security accounts are the most progressive idea of this generation.

Done right, personal accounts would increase benefits substantially for all working people, including the lowest income workers. They would allow workers in the bottom half of the income distribution into the capital markets to join upper-income workers in their rightful role as owners as well as laborers. Ownership of wealth would become far more equal and democratic as a result.

African Americans, Hispanics, and other low-income communities would gain tremendously from this new control over substantial capital that can be passed on within the family. African-American males would no longer lose out, as the majority of black males born today have no prospect of collecting any significant Social Security retirement benefits due to their lower life expectancies.

Moreover, the general economic benefits of personal accounts will include higher wages and more jobs resulting from the increased savings and investment. Avoiding the major benefit cuts and/or higher payroll tax increases that would otherwise be necessary under the current system would also be most beneficial to working people, especially those with lower incomes.

Of course, hard-core ideological socialists will not be swayed by these arguments. But this is a small and dwindling group. By contrast, those who truly have the interests of working people, minorities, and lower-income families at heart cannot help but be moved by the compelling case for personal accounts.

If reformers could just win some support from these quarters, the campaign for reform would be all but won. The opposition will then have been totally outflanked and will collapse. Sure, the diehards will fight on. But the battle will be over. Therefore, this is an urgent priority with a potentially huge payoff that reformers have not fully appreciated.

The second major area for action is to maximize interest, support, and organization among the grassroots conservative base. Quite frankly, no other domestic economic reform could be bigger for conservatives than a personal-account option for Social Security, not by a long shot. Well-designed and ultimately expanded personal accounts would effectively produce the biggest tax cut in world history, the biggest reduction in government spending in world history, and the biggest reduction in government debt in world history. They would short-circuit an otherwise inevitable sharp increase in Social Security payroll taxes. They would do more than any other possible reform to increase the long term prosperity of working people. By vastly broadening capital ownership, they would cement much greater support for free markets with even greater long term prosperity as a result.

Ideologically attuned and motivated grassroots conservatives will listen to this case even this fall. They can be moved now to work on the grassroots organization and infrastructure that will be essential for eventual success.

This action agenda leaves much to do, now.