Republicans Fumbled the Ball on Social Security

B ack in 2005, newly reelected President George W. Bush decided to expend his political capital by pitching Social Security reform. He noted that the nation’s demographic changes were catapulting the program to insolvency, so he proposed to let workers divert up to four percentage points of their payroll tax into personal retirement accounts, which would then be invested in the stock market.

Naturally, Democrats treated the idea as though we’d be handing Grandma her life savings and setting her loose in a casino. They warned that under such a plan, future generations would see benefit cuts, and the plan died without a vote.

Bush’s plan found little purchase even with fellow Republicans, who approached it as if it were a Coachella porta-potty. Iowa Senator Chuck Grassley, the then-chairman of the Senate Finance Committee, called passing the bill a “heavy lift” and made it clear he wasn’t going to be the one applying stress to his spine. “I think 90 percent of the lifting is with the president,” Grassley said at the time.

Of course, the Democratic attacks did not quickly abate. In 2008, Barack Obama frequently attempted to tie GOP presidential candidate John McCain to the Bush Social Security plan. During his momentous nomination speech, Obama used a portion of his time to hammer McCain for supporting “a plan that would privatize Social Security and gamble your retirement.”

Yet 20 years later, the scoreboard isn’t subtle. On the last trading day of 2005, the Dow Jones Industrial Average closed at 10,783; today, it tops 44,000 — a fourfold increase. The only thing riskier than “gambling” on American enterprise was failing to trust the virility of the nation’s stock market.

Economist Andrew Biggs of the American Enterprise Institute recently reran the numbers on Bush’s plan. Had Congress pulled the trigger, low‑ and middle‑income workers retiring this year would be enjoying total Social Security benefits 3 to 8 percent higher than current law promises — and that’s after the Great Recession, a pandemic, and more market mood swings than a toddler after downing a Monster energy drink. In real‑world terms, the modeled very‑low earner would be up 5.8 percent; the medium earner, 2.8 percent richer. Not exactly a Vegas sob story.

And, of course, all the kvetching about how Bush’s plan would accelerate Social Security’s insolvency was hyperbolic nonsense. In fact, the opposite was true.

“Had Congress approved Bush’s proposal and signed it into law, the reform would have extended Social Security’s solvency for roughly a decade and reduced the program’s long-term funding shortfalls by around one-third,” Biggs concluded. He added that Bush’s reforms amounted to “protecting benefits for most retirees, particularly seniors who rely on Social Security the most.”

Back in 2018, Heritage Foundation analysts reached a similar conclusion: across all 50 states, workers would net significantly more by investing their payroll taxes than by trusting Uncle Sam’s promise of future checks. The analysis found that a male born in 1995 who had the ability to invest a portion of his Social Security contributions in private accounts would come out around a million dollars richer when retiring at age 80. Congress’s aversion to political discomfort thus trapped Americans in a program that denied them small fortunes.

But in 2005, Social Security was running surpluses — real cash that could have seeded personal accounts without stiffing current retirees. Fast‑forward to today: the program is now a fiscal treadmill utilized by a jogger with chronic heart disease.

And because the program is in such perilous shape, the possibility of private accounts is now dead. Social Security is now a pay-as-you-go system, in which payroll taxes from current workers are delivered directly to current retirees and their dependents. Clearly, the only reason Bernie Madoff went to prison is that he didn’t have the word “congressman” in front of his name.

But that is why pulling funds out of the Social Security “trust fund” to be invested in tangible stocks and bonds would be calamitous to current recipients. Romina Boccia of the Cato Institute reminds us that the “trust fund” is basically an IOU drawer; since 2010, the Treasury has already redeemed over $1 trillion of those slips, adding the cost to the national debt. Diverting half of payroll taxes to personal accounts today would balloon the 30‑year financing gap from $30 trillion to $83 trillion — an extra $50 trillion bill with our names on it. The surplus safety net is gone.

Of course, the opposition in 2005 wasn’t a calm actuarial critique; it was political kabuki. Democrats framed private accounts as a sinister Wall Street plot. (Oddly, those same lawmakers now praise 401(k)s, which are — brace yourself — private accounts invested in Wall Street.) Members of Congress also invest their retirement funds in federally run investment accounts like the Thrift Savings Plan — the model for what Bush had proposed for private citizens.

Nonetheless, the scare line worked — a Los Angeles Times poll taken at the beginning of Bush’s second term found that only 42 percent of Americans favored a plan to allow citizens to invest their Social Security benefits in private accounts, while 52 percent opposed the plan.

The public didn’t see the long-term picture: Markets deliver volatility in the short term and solid returns over decades; Social Security delivers only short-term scare tactics and suffocating debt.

We have heard the same hyperbolic rhetoric about the recent Republican plan to wrest control of Medicaid’s runaway train to insolvency: Too risky! Cruel to seniors! Handout to bankers! Remember that the people condemning “privatization” in 2005 made willing young workers forfeit jackpots the size of starter homes. When Democrats are in charge, the rhetorical house always wins.

Democrats in 2005 bet against the American economy and, by extension, against the American worker’s ability to manage his own money. The past two decades have shown which wager paid off. When the next reform window cracks open — and it will, because arithmetic is relentless — let’s not fold the winning hand because someone screams “gambling.” The real gamble is trusting a program that has already spent your chips.