Private-Account Concept Grew From Obscure Roots
By Jeffrey H. Birnbaum
Washington Post Staff Writer
Tuesday, February 22, 2005; Page A01
Twenty-five years ago, Peter J. Ferrara was a Harvard Law School student with what he called "the craziest idea in the world." In a paper he wrote before graduating, he suggested converting the government-run Social Security program into a web of private investments.
The paper caught the eye of Edward H. Crane, a former head of the Libertarian Party who had recently started the Cato Institute, which has a stated mission of encouraging "limited government." To him, Ferrara's idea wasn't crazy at all, but a way to challenge Washington's largest and most revered social program.
With Crane's backing, the proposal by the 24-year-old Ferrara began an improbable journey from the fringes of public policy into the mainstream. Today, far from its origins in the political wilderness, the notion of creating Social Security personal accounts is at the top of President Bush's domestic agenda and stands to spark the year's biggest legislative battle.
None of this would have happened without the persistence of conservative operatives, the explosive growth of the stock market in the 1990s and the eventual adoption of the idea by big business.
The story is peopled with quirky characters such as Ferrara, a brilliant and notoriously unkempt wonk, and Crane, one of the prickliest critics of Washington's bureaucracy. It also has its irony: After years of struggle in obscurity, the free-marketers are now at war with themselves. Crane, Ferrara and the business interests that have become the effort's primary financial supporters are at each other's throats over how to structure and promote the accounts.
"Ed Crane and I don't talk anymore," Ferrara said. "Cato wants to get rid of the entire Social Security system, and I don't."
Cato's privatization effort was aimed from the start not just at dismantling Social Security but also at making major inroads against what it considered an overweening central government. "Social Security," said David Boaz, Cato's executive vice president, "is the linchpin of the welfare state."
To Cato critics like the Brookings Institution's Henry J. Aaron, Cato's goal was to "topple the great monument of 20th-century liberalism."
With its roots so radical, few official Washingtonians paid Cato much heed at first. Crane, after all, was preparing to manage the also-ran campaign of Libertarian Party presidential candidate Ed Clarke, and Ferrara was just another third-year law student about to join a white-shoe Manhattan law firm.
But Crane saw promise in Ferrara's analysis and encouraged him to expand it. In his paper, Ferrara predicted that Social Security eventually would run short of cash, requiring a serious revamping. Crane paid Ferrara $5,000 to elaborate his thesis into what would become Cato's first hardcover book -- "Social Security: The Inherent Contradiction."
The tome made Ferrara a cult hero of the emerging political right. After Ronald Reagan was elected president in 1980, Cato held a conference that featured Ferrara and drew close to 200 congressional staffers as well as Rep. Claude D. Pepper (D-Fla.), Social Security's chief protector. But Ferrara was more apprehensive than elated by the turnout. "I knew this idea was too far out for serious consideration. It needed vetting," he said.
Academics led by Nobel laureate Milton Friedman had long questioned Social Security's link to government. Harvard University's Martin S. Feldstein argued in the 1970s that the program depressed national savings, a key to economic growth. Economist Carolyn Weaver wrote a groundbreaking article for Cato in 1979 arguing that a private system might work better. But Ferrara and Crane knew that transforming theory into practice -- especially a theory as controversial as this one -- would take years.
They were encouraged in 1981 when Chile, acting without Cato's influence, added investment accounts to its retirement system. But two years later, disappointment set in when a presidential commission led by Alan Greenspan (the future chairman of the Federal Reserve) proposed extending Social Security's solvency without resorting to private accounts.
In the fall of 1983, Cato made clear that it was preparing for a protracted fight. It published a paper by Heritage Foundation scholars Stuart M. Butler and Peter Germanis that called for "guerrilla warfare against both the current Social Security system and the coalition that supports it." They compared the drive to Nikolai Lenin's effort to undermine capitalism: "Lenin well knew to be a successful revolutionary one must also be patient and consistently plan for real reform."
Any hope for rapid victory was hampered by a lack of financial backing from Wall Street. Crane said that in the early days, financial institutions routinely rebuffed his pleas for money. "The idea that they were going to promote something that Washington politicians oppose is naive," Crane said.
Nevertheless, Cato was joined by other free-market think tanks such as Heritage and the American Enterprise Institute in holding conferences and publishing books and articles about Social Security alternatives. In 1988, the concept got its first big break when former Gov. Pierre S. "Pete" duPont IV (R-Del. ) became the first presidential candidate to call for private accounts.
But the real boost came later -- during the go-go years of the 1990s. Surpluses in the Social Security trust fund mounted and the stock market boomed, creating an environment friendly to personal investing. "The big increase in the number of market participants changed the climate and made the discussion of individual accounts more acceptable," said Michael D. Tanner, director of the Cato Project on Social Security Choice.
Not by coincidence, private-account advocates soon found a public supporter in the financial-services industry. William G. Shipman, an always dapper officer of Boston-based State Street Global Advisors, testified before Congress in 1994 that the returns from private investments would dwarf Social Security's benefits. He was quickly enlisted as an emissary for Cato.
Moderate Democrats also began to toy with personal accounts as an add-on to Social Security. Chief among them was Sen. Daniel Patrick Moynihan (D-N.Y.) and, before him, Sen. Robert Kerrey (D-Neb.), who became enamored with the idea during a 1994 commission on entitlements that he co-chaired.
In 1998, President Bill Clinton and his economic advisers spent 18 months secretly discussing elements of a plan to add individual investment accounts on top of Social Security, but they abandoned it when it became clear that the president was about to be impeached.
By then, however, George W. Bush was already a fan. He had talked about private accounts as early as 1978 during his unsuccessful run for the House of Representatives, according to the Texas Observer. But he got serious in 1997 when, as Texas governor and a soon-to-be declared candidate for president, he met over dinner with Crane and Jose Pinera, Chile's former labor minister, who was helping Cato spread the gospel of private accounts.
By 1998, the usually cautious corporate lobbying establishment was willing to endorse the idea, signaling another high point in the acceptance of private accounts. The National Association of Manufacturers formed a business coalition dedicated to shoring up Social Security and preventing future payroll tax increases that could cost employers billions. One of the guiding principles of the Alliance for Worker Retirement Security was to permit workers to invest their payroll taxes in self-directed retirement accounts.
During the 2000 campaign, Bush became the first top-tier presidential candidate to advocate private accounts. After taking office, he appointed a commission to study them. The members included Cato affiliates such as Weaver and Leanne Abdnor, founder of Alliance for Worker Retirement Security.
Nowadays, Cato alumni are everywhere in the Bush administration and in groups advancing the president's Social Security initiative. Former Cato analyst Andrew G. Biggs is an associate commissioner of the Social Security Administration. Abdnor heads a pro-private-accounts group, For Our Grandchildren. The director of the Alliance for Worker Retirement Security, Derrick A. Max, previously worked for Abdnor (when she was at Cato) and for Weaver (when she was at the American Enterprise Institute).
Charles P. Blahous, the White House aide leading the president's charge for private accounts, preceded Max as head of the Alliance for Worker Retirement Security.
But these connections haven't led to harmonious relations. Ferrara is pushing for private accounts much larger than those in Bush's plan and opposes any reduction in benefits for those who remain in the government system. Cato also favors larger accounts but would accept smaller benefits than currently slated. The business coalition is comfortable with the White House plan.
In a confidential memo this year, a Bush aide derided as a "bad idea" the views of "a small number of conservatives . . . who prefer to push only for investment accounts and make no effort to adjust benefits."
Wearing a lint-flecked suit and wing-tip shoes badly in need of polish, Ferrara ripped into this opinion as he strode down K Street. "The staff didn't do such a good job of developing the president's proposal," he said. He also scolded his former colleagues at Cato. "They are misreading public opinion if they think people want a laissez-faire, tear-it-down system."
"Peter's a difficult personality," said Cato's Boaz. "Then again, some might say that Ed [Crane] is a difficult personality, too."
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