Private Accounts Still Make Sense

Why the market meltdown doesn't negate the case for privatizing Social Security


Wall Street's wild ride over the last few weeks has many critics of President Bush's 2000 campaign promise to create personal Social Security accounts dredging up the issue to score points with justifiably frightened voters.

Barack Obama's campaign has used the issue as a cudgel to whack John McCain, who supported President Bush's plan. Embattled GOP senators such as New Hampshire's John Sununu are also finding themselves on the defensive as the issue of private accounts is resurfacing in campaign attack ads.

President Bush deserves criticism for the way he pushed private accounts, but not for the idea itself. He deserves scorn for the awful way his administration argued for the idea; for his refusal to expend any political capital to pass what would have been a historic, game-changing reform; and for the way he abandoned the issue at the first sign that it was hurting him politically. The same goes for Republicans who once supported the idea, but who today no longer have the courage to argue for it.

Private accounts made sense in 2001, and they still make sense today, even after the calamitous last month in America's capital markets.

Bush's plan basically allowed for younger workers to create private Social Security accounts, which they could then invest in a mix of balanced stocks, bonds, commodities, and other financial holdings similar to the way most people invest their 401(k) plans today. It was only part of their Social Security tax, but it was at least a start.

More importantly, the plan would have taken a step toward giving Americans ownership over the money they "contribute" (the government's term, not mine) to Social Security. Within a generation, what you and your employer contribute would no longer go into a general fund that can be raided at the will of Congress, but to a personal account with your name on it. Not only could you then invest that money to yield a (much) higher return than what you'd get from the government, but should you die early, the money you've been contributing for all your adult life would be passed on to your heirs. Today, it goes back to the government.

Had the Bush plan been successful, millions of poor people would have begun to accumulate inter-generational savings that could help their children or grandchildren escape the cycle of poverty. Our Social Security system would not only be sound, it would be more honest. Your contribution to your retirement would be exactly that, as opposed to what it is today, which is a tax on youth used to prop up a Ponzi scheme to provide benefits for the elderly.

So what about that financial meltdown? Wouldn't the carnage we've seen in the financial sector of late have wrecked all of these private Social Security accounts? It isn't likely. The earliest the Bush plan could have been implemented would have been January 2003. The Dow at that time stood at 8,607. Last Friday the Dow closed at 10,325, its lowest point in two years. Even if you had invested your entire account in stocks on the day the Bush plan took effect, and then retired on Friday, you'd still likely have come out pretty well.

But that's not even really an accurate assessment of what would have happened. No one gets his first paycheck five or six years before retirement. And all of the plans for full or partial Social Security privatization called for bringing in private accounts in phases. People already near retirement would have received the same benefits they were anticipating. But younger people would have had 20 or 30 or 40 years to invest, using the power of compound interest to yield returns exponentially higher than the maximum 1.5-2.5 percent you can expect from the government. Even if the Dow drops below what it was in 2003, anyone would have had Social Security funds invested in it wouldn't be retiring for decades.

There's no period in the history of the stock market—including the crash of 1929, the stagflation of the 1970s, the crash of 1989, and the tech bubble burst of the early 2000s—in which a worker who'd been investing for 30 years or more wouldn't have still received a far better return than what he got from Social Security, even if he retired the day after a historic Wall Street dive.

Of course, this is assuming that you'd have invested your entire account in stocks. That isn't the way most people invest—which is to balance the risk in their retirement plans among stocks, bonds, CDs, and other investments given their age, income, and other assets. Even still, most of the plans for private accounts under consideration eight years ago still provided for a safety net to protect those workers who might have unwisely invested their entire account in, say, Enron or Lehman Brothers.

Critics now trying to use the financial crisis on Wall Street to make political hay of the push for private accounts in 2001 also neglect to mention that for all the risk they want to associate with Wall Street, if you're under 40, you're at far greater risk of never seeing your Social Security deductions under the present system than under any privatization plan. Social Security faces an unfunded liability of $4 trillion over the next 75 years. USA Today reported in May that the combined federal liability for Social Security, Medicare, and other government programs for everyone currently eligible is more than $57 trillion, or $500,000 for every household in the country. And, of course, Congress can raid the Social Security "trust fund" at will.

The stock market is risky? The federal government currently has obligations it will never be able to keep. And none of this accounts for trillion-dollar bank bailouts, inevitable wars, or the new entitlements promised by the current candidates for present and future occupants of the White House. At 33, I don't expect to get a dime from Social Security. If you're younger than I am, you shouldn't, either.

President Bush and other Republicans running for re-election today do deserve criticism for the way they handled the Social Security privatization debate back in 2001. Not for supporting the idea, but for failing to muster the political will to pass it when they had the chance.

Radley Balko is a senior editor of reason. A version of this article originally appeared at FoxNews.com.