One sidelight of President George W. Bush’s recent trip to Rome for the funeral of the pope was the apparently warm interaction between Presidents Bush and Clinton. In particular, Bush praised Clinton’s thinking in the area of Social Security. This praise focused the public eye on an underappreciated fact. President Clinton devoted an enormous amount of effort to the study of Social Security reform. It may well be the case that Social Security reform would have been accomplished if impeachment had not taken over the agenda.
With that in mind, it is instructive to wind back the clock and look at how Social Security reform played out back then, and compare it to the current episode.
The statement that the Social Security system faces a long-term crisis has been met with cries of protest, but during his presidential tenure, Clinton made the same point. Just as Bush has made Social Security his number one domestic agenda item today, President Clinton put the issue ahead of all others with his “Save Social Security First” campaign. And like Bush, who is a champion of individual investment accounts, Clinton considered accounts a central component of reform. It is likely that this view, combined with the strong support of congressional Republicans for personal accounts, would have set the stage in the late 1990s for a grand bargain on Social Security.
Clinton’s 1994-96 Advisory Council on Social Security, which was arguably less stacked than the one Bush appointed, concluded that actuarial balance was not a strong enough goal. Instead they set forth the standard that the ratio of the trust fund to benefits needs to be flat or growing at the end of the 75 year period — a goal that is basically mirrored in President Bush’s objective of “sustainable solvency.” But today, reform opponents want to stop the clock at 75 years.
Furthermore, all three factions of the Clinton panel supported a reliance on equity investments at least in part, a practice that current opponents of personal accounts argue is too risky. The panel members disagreed on whether investment should be made by individuals or centrally through the trust funds, with a majority supporting individual accounts. As Douglas Elmendorf, Jeffrey Liebman, and David Wilcox, all veterans of the Clinton administration, remark in their paper, “Fiscal Policy and the Social Security Policy During the 1990s,” “the idea of individual accounts had, in a few short years, made a remarkable transition from the white papers of libertarian think tanks to the mainstream policy debate.” Such an acknowledgment should help to dampen accusations that accounts are little more than a right-wing conspiracy.
The Clinton administration was quite serious about personal accounts and made significant inroads in figuring out how they might work. Experts within the administration investigated in great detail options to minimize both the risks and the costs of creating accounts. Their work provided a number of important and interesting contributions in the policy arena. For example, one challenge in structuring accounts is the timeliness in which deposits can be made. The working group at the Clinton Treasury developed a plan whereby deposits could be made based on previous years’ earnings and reconciled later. They also developed a model where workers could make their investment choices on their annual tax forms. Another option they looked at to minimize costs was to not allow any level of investment choice until an account balance reached a minimum amount, an idea that has since become popular in a number of more developed account-based plans. While they recognized that new risks would be introduced by investing in stocks, as the paper reports, “On balance, however, the economic team did not think that market risk was a sufficiently important concern to rule out plans that involved equities.”
It is important to note that these accounts would have been supplemental — though analyzing the impact of this is impossible without knowing how the rest of Social Security would have been balanced. (For more on this see “Hung Up on Words.”) There is one more similarity. Many opponents of Social Security reform continue to comment on how the real problem is Medicare. (Though few of them have actually proposed anything constructive to fix Medicare.) That is true today just as it was true when the Clinton administration pursued Social Security reform. However that does nothing to undermine the argument that Social Security needs to be fixed — in fact, it makes the argument stronger.
If a patient has been bitten by a rabid animal, you fix the cut and then you give him medicine. You need to start somewhere. Fixing the cut first is not a sign that you plan to withhold medicine in the future. The Clinton administration recognized this without setting off alarms on the editorial pages. Bottom line: Fixing Social Security is just as important today as it was when Clinton wanted to tackle the job — more so, in fact, since years have elapsed.
Given how many areas of agreement there were in the Clinton ’90s on Social Security reform, one would think the possibility for broad-based bipartisan compromise would still exist today. To be sure, the fiscal environment has changed dramatically, making the options more difficult. But the underlying problems facing Social Security remain. Perhaps the rhetorical hugs in Rome can serve as the starting point for turning those many points of agreement into a bipartisan plan.