We are at an interesting point in the Administration's push to create individual accounts in Social Security. With tax reform on the back burner at least for now and nothing changing in Iraq even as they keep announcing that they have broken the back of the insurgency, Social Security is where the Administration is going to want to make its second term mark.
Some basic contours of the proposal are already pretty clear. Over the next ten years, use hundreds of billions in present-law payroll tax revenues to create individual accounts for people below a given age such as 55, funded, if that is really the word for it, by borrowing hundreds of billions of dollars.
The politics are also getting predictable. With little if any Democratic support likely (although I suppose they will try for Joe Lieberman), it has to be rammed through on a straight-line Republican Party vote. But we can see already that the Administration has lost a bit of leverage with Republicans in Congress because there is no more need to reelect Bush, and the fellas in Congress are bound to get nervous about the midterm elections.
So the proposal will have to be candy-coated like mad to get it through, the key being to make it attack ad-proof. So no tax increases to help pay for it, and I suspect little in the way of real and credible benefit cuts down the road to reduce the implicit Social Security debt commensurately with the increase in explicit debt. E.g., they may guarantee that no one can do worse than under present law, leaving investors in a "heads we win, tails the government loses" posture. The consequences of this might be limited by restrictions on portfolio choice in the accounts, but the problem is still there, and if Congress down the road lets people use the accounts pre-retirement for all sorts of worthy needs, while keeping the guarantee of traditional-level Social Security benefits, then it could get ugly indeed.
Plus there will be manipulation of budgetary rules to avoid scoring the Bush proposal as increasing deficits or public debt. And here is where leading conservative thinkers had better think about their reputations. If they are serious about their principles, they should not endorse the proposed new budgetary rules, or the Administration's Social Security plan, even if bears some passing resemblance to what they have been advocating, if it ends up being a budgetary scam that pushes us closer to default due to the sugar-coating and absence of adequate offsets. In other words, they should cut loose if this turns out be Medicare prescription drugs all over again, where the new benefit was supposed to be paid for by cost-saving measures but those measures basically evaporated. Not to name names (well okay, let's), but I am hoping that the likes of Martin Feldstein, Glenn Hubbard, Kent Smetters, and Andrew Samwick will subject the Administration's proposal to the same standard of serious scrutiny that they would have insisted on if it had been proposed, say, by Clinton in 1999.
What is the main reason for individual accounts in Social Security? While there are some arguments for greater portfolio choice by participants, these arguments are not overwhelming given the paternalistic reasons for the program (trying to require minimal rationality in lifetime consumption smoothing and investment choice) along with the administrative costs of running millions of small accounts. You can argue this one either way, but I don't see it as a really big thing. To Feldstein et al, I think the real key behind privatization is to nudge voters and consumers, in large part through well-intended but tricky fiscal language games, towards greater national saving.
But will the plan that is advanced by the Administration really accomplish this? My guess is that it will be more on a par with the idea of "funding" individual retirement accounts by printing money. Few would view that as a sensible step towards increasing national saving, and I suspect we will wind up with something that is not much better.
The Administration's reasons for pushing individual accounts are unlikely to have anything do with this concern about national saving, or even with increasing portfolio choice (although they may want to reward their friends in the securities industry who would run the accounts, if the terms of running the accounts do not prove too thankless). Reason 1 for the Administration is that you have to do something in your second term, and nothing better comes to mind. Reason 2, the "philosophical" Rove-Norquist reason, is to change the payor's name on the Social Security checks that seniors get, so the checks will not seem to come from the government. From this standpoint, you could even do nothing and have everyone get the same checks as previously, so long as the checks seem to come from one's own individual account rather than from Uncle Sugar. This is supposed to make seniors less pro-government and more pro-Republican. In short, an "ownership society" via re-labeling of Social Security benefits even if nothing changes on the ground.
But to do this, they are actually going to have to change things on the ground, and potentially in a manner that pushes the Federal government closer to default. If this is what the Administration's plan does, principled conservative thinkers had better get off the partisan bandwagon and say so.