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Conservatives Splitting on Social Security
Some Opinion Leaders Unconvinced on Bush Proposal for Personal Accounts
By Jonathan Weisman
Washington Post Staff Writer
Tuesday, March 29, 2005; Page E03
President Bush's proposal to add private investment accounts to Social Security is beginning to create controversy within the one group that has most forcefully embraced the idea in theory: the conservative intelligentsia.
Under Bush's approach, personal accounts "are complicated," wrote Alex J. Pollock, a finance expert at the conservative American Enterprise Institute, in a paper he will present at AEI today. "To many people, they are downright confusing and even frightening, and they require diverting a portion of payroll taxes away from the U.S. Treasury."
Conservative Harvard University economist Robert J. Barro broke with the White House in the April 4 issue of Business Week, writing, "Overall the accounts are a bad idea." Tyler Cowen, a free-market economist at George Mason University, has linked his Web log, Marginal Revolution, to Barro's dissent, declaring, "Robert Barro agrees with me on Social Security."
To be sure, the White House can tap a deep well of support among conservative academics. Harvard economist Martin Feldstein has spoken glowingly of private accounts, as have Nobel laureate Gary S. Becker and Richard A. Posner, both of the University of Chicago.
But Cowen and others say the cracks in public support for the president's approach are only the surface manifestations of wider misgivings on the right.
"For different reasons, I think support is waning," said Barro, who for years had embraced private accounts.
For several months, the White House has had to contend with some private-accounts supporters who argue that Bush's plan is far too timid. Now, the administration must confront a new group arguing the proposal represents an unwise expansion of Social Security's promises.
"I think there was a kind of notional support among right-wing or free-market intellectuals," said Cowen, "but now they're getting nervous. Even if they're not speaking out, they just figure it will die on the vine."
Under the Bush proposal, workers could divert up to 4 percent of wages subject to Social Security tax into a private account, which could be invested in stocks and bonds. Because the money going into the accounts would otherwise go to current beneficiaries, the government would have to borrow trillions of dollars to ensure current Social Security benefits would not be cut.
Workers who opted for accounts would see their base Social Security benefits reduced by a dollar for every dollar put into their accounts, plus a 3 percent "offset" on the account contributions.
In his column, Barro argued that politicians will never allow private accounts to replace the Social Security system. So the accounts system -- as outlined by Bush -- would end up being what Barro views as an unwise supplement to existing benefits. Instead, he argued, the program should be stripped down to a minimum payout to keep the elderly out of poverty while putting Social Security on solid financial footing.
"There is no good reason to go beyond the minimum standard; that is why I view personal accounts as a mistake -- they enlarge a Social Security program that already promises too much," Barro wrote.
Pollock takes a different tack. As personal accounts are envisioned, most people will see them as too risky and complicated. And the government's upfront borrowing costs are simply too high, he said.
The federal government enjoys a substantial surplus of Social Security taxes, and that surplus is used to finance other government programs. For every dollar "borrowed" from Social Security, the Social Security system receives the equivalent in the form of a Treasury bond.
Rather than have those bonds go to the Social Security Administration, Pollock suggests they go into private accounts, in the form of inflation-indexed Treasury bonds, or TIPS. After some number of years, the bonds could be traded for other investments, like private-sector bonds or stocks.
Under the plan, there would be no huge, upfront borrowing costs for the government. Social Security taxes would remain dedicated to Social Security, answering the Democrats' loudest objection. And individuals nervous about private financial markets would be offered accounts with perhaps the safest investment vehicle on offer.
"The fundamental idea of long-term savings accounts, which really do generate assets for ordinary people, that's a great idea," Pollock said. "The question is, can you design a system that works?"
Kevin A. Hassett, director of economic studies at AIG, said the splintering of ideas among conservatives is only natural. For all of its talk, the White House has yet to formally propose a comprehensive overhaul of Social Security, and in its absence, intellectuals have jumped into the fray.
But with so many ideas in play, the White House has to step in soon with a plan around which conservatives can coalesce, Hassett said.
"If the White House doesn't have a plan soon," Hassett said, "it's very unlikely the White House will win."
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