Politics & Policy

Personal Accounts, Not Tax Increases

These are opposing alternatives, not complements.

When I began working on the issue of Social Security, at Harvard Law School in 1978, Pete Peterson, a prominent conservative who had been secretary of Commerce under President Nixon, was arguing that the problem with the program was that the benefits were too high. With the average widow’s benefit at $500 a month back then, Peterson — a Wall Street banker to boot — didn’t get too far with his argument.

I developed an opposite argument, one that drew on themes raised by Barry Goldwater and Ronald Reagan. My position was that if you evaluated Social Security taxes and benefits in the light of market investment returns, the program was becoming a bad deal for working people. The benefits, particularly in the future, were too low, not too high.

Around the same time, José Piñera started making the same argument in Chile, which enacted historic personal-account reforms in 1981. For a year he explained to Chilean television audiences how workers would get a much better deal with personal accounts.

In time I developed this theme into a positive, even populist, reform model in books, studies, and articles. Real-world Republican and conservative candidates began campaigning on this politically seaworthy approach starting in the late 1980s. By the late 1990s, they were winning election after election on these very grounds.  Pollster John Zogby summarized the 2002 elections by saying that in every contest where personal accounts were a central issue, the candidate in favor of the accounts won.

These successful candidates didn’t say we need to cut future benefits, or raise taxes, or lift the retirement age. They said workers would get a better deal through personal accounts, and even contrasted this approach with the bad alternatives of tax increases and benefit cuts. These candidates included President Bush, who campaigned on personal accounts in particular in 2000.

After taking office, however, Bush hired for his White House Social Security staff inside-the-Beltway, pain-caucus types who never really understood this positive approach to reform. For these policy makers, the meat of Social Security reform was benefit cuts, and if necessary tax increases, to balance the long-term Social Security budget. Personal accounts became the dessert that hopefully would convince voters to ingest the castor oil of benefit cuts and tax increases first.

By contrast, the original goal of personal accounts was to massively reduce long-term entitlement spending by shifting benefits to the private sector while giving workers a much better deal.  A balanced Social Security budget would be a byproduct of this process. Critically, if you are shifting benefits to the private sector, there is no longer any need or scope for the extreme negative of cutting future benefits.  Instead you can talk about the extreme positives of greater benefits and the much better overall deal provided by personal accounts.

I argued after Bush’s election in 2000 that if he started talking about cuts in future promised benefits, the focus on personal accounts and their enormous positives for workers would be lost. I argued that Democrats and liberals would respond by insisting that any future benefit reductions would have to be “balanced” by tax increases. I argued that the Democrats also would insist that if they ever were going to agree to future benefit reductions, that the president would have to forego personal accounts as well.

All of this has now come to pass.

The president first endorsed massive reductions in future promised benefits through so-called “progressive price indexing.” This brought us back to the old Pete Peterson argument that benefits are too high. Then, to accommodate Democrats, Bush was forced to insist that all negotiating points, including tax increases, were on the table. And now, iron-fisted Democrats are insisting that they will never consider real personal accounts that substitute for any part of the old, 1930s framework.

Robert Novak reported on January 8 what has since been reported elsewhere: “Democrats refuse to talk with Republicans about personal accounts ‘carved out’ of the present system. Indeed, a ‘carve out’ is now a dead letter. New personal retirement accounts could be passed only as an “add on.”

Consequently, reformers who are arguing that tax increases must be on the table if there is any chance for personal accounts remain hopelessly behind the curve.

Just last week, Rep. Michael Pence penned a brilliant article in the Wall Street Journal showing the way forward. He rejected any tax increases as part of a Social Security reform package. Pence argued that the only hope for future reform is to focus on “improving the system so that it offers a better deal to younger Americans through personal savings accounts.”

Then, in an article entitled “The Pence Tax Increase,” Carrie Lukas, vice president for policy and economics at the Independent Women’s Forum, said that if Pence will not support a tax increase to close a Social Security reform deal with the Democrats, he should be held responsible for all future tax increases that will be necessary due to the failure to reform Social Security now. But Lukas needs to hold Karl Rove and President Bush equally accountable, since Rove has adamantly assured conservatives that the president will not support a tax increase as part of a Social Security deal.  Then there is the problem of those pesky Democrats who have rigidly insisted that they will not consider personal accounts, even in return for a tax increase.

It’s time for a reality check. As set out above, personal accounts will come neither through tax increases, nor cuts in future benefits. Quite to the contrary, the drift toward these politically poisonous alternatives is what has cratered the campaign for personal accounts. If blame is to be handed out, blame those who misled the president down this pain-caucus trail — they are the ones who should be held responsible for any future tax increases due to the failure of reform at the present time.

The only way to achieve the goal of personal accounts is to go back to the positive and populist reform model on which George W. Bush was first elected to the Oval Office. Reformers in Washington must propose a specific personal-accounts plan that includes no tax increases or benefit cuts and presents obvious and overwhelming benefits to working people. Then they must take their plan over the heads of the Washington establishment and directly to the American people, as President Reagan did successfully time and again.

As Pence wrote in the Journal, “Republicans don’t have to pass a bad Social Security reform bill. If we lack the votes now to pass legislation that will actually preserve the system and protect our nation’s economic expansion, we would be wise to spend the next two years seeking to win the debate and leave a foundation of arguments that will not unravel.”

Better personal accounts late, than never.

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