Homestead mailing list

[Gene GeRue <genegerue AT ruralize.com>]

Fitting the Bill?
How would Clinton have saved Social Security?

By Kevin A. Hassett & Maya MacGuineas

One sidelight of President George W. Bush’s recent trip to Rome for the 
funeral of the pope was the apparently warm interaction between Presidents 
Bush and Clinton. In particular, Bush praised Clinton’s thinking in the 
area of Social Security. This praise focused the public eye on an 
underappreciated fact. President Clinton devoted an enormous amount of 
effort to the study of Social Security reform. It may well be the case that 
Social Security reform would have been accomplished if impeachment had not 
taken over the agenda.

        
With that in mind, it is instructive to wind back the clock and look at how 
Social Security reform played out back then, and compare it to the current 
episode.

The statement that the Social Security system faces a long-term crisis has 
been met with cries of protest, but during his presidential tenure, Clinton 
made the same point. Just as Bush has made Social Security his number one 
domestic agenda item today, President Clinton put the issue ahead of all 
others with his “Save Social Security First” campaign. And like Bush, who 
is a champion of individual investment accounts, Clinton considered 
accounts a central component of reform. It is likely that this view, 
combined with the strong support of congressional Republicans for personal 
accounts, would have set the stage in the late 1990s for a grand bargain on 
Social Security.

Clinton’s 1994-96 Advisory Council on Social Security, which was arguably 
less stacked than the one Bush appointed, concluded that actuarial balance 
was not a strong enough goal. Instead they set forth the standard that the 
ratio of the trust fund to benefits needs to be flat or growing at the end 
of the 75 year period — a goal that is basically mirrored in President 
Bush’s objective of “sustainable solvency.” But today, reform opponents 
want to stop the clock at 75 years.

Furthermore, all three factions of the Clinton panel supported a reliance 
on equity investments at least in part, a practice that current opponents 
of personal accounts argue is too risky. The panel members disagreed on 
whether investment should be made by individuals or centrally through the 
trust funds, with a majority supporting individual accounts. As Douglas 
Elmendorf, Jeffrey Liebman, and David Wilcox, all veterans of the Clinton 
administration, remark in their paper, “Fiscal Policy and the Social 
Security Policy During the 1990s,” “the idea of individual accounts had, in 
a few short years, made a remarkable transition from the white papers of 
libertarian think tanks to the mainstream policy debate.” Such an 
acknowledgment should help to dampen accusations that accounts are little 
more than a right-wing conspiracy.

The Clinton administration was quite serious about personal accounts and 
made significant inroads in figuring out how they might work. Experts 
within the administration investigated in great detail options to minimize 
both the risks and the costs of creating accounts. Their work provided a 
number of important and interesting contributions in the policy arena. For 
example, one challenge in structuring accounts is the timeliness in which 
deposits can be made. The working group at the Clinton Treasury developed a 
plan whereby deposits could be made based on previous years’ earnings and 
reconciled later. They also developed a model where workers could make 
their investment choices on their annual tax forms. Another option they 
looked at to minimize costs was to not allow any level of investment choice 
until an account balance reached a minimum amount, an idea that has since 
become popular in a number of more developed account-based plans. While 
they recognized that new risks would be introduced by investing in stocks, 
as the paper reports, “On balance, however, the economic team did not think 
that market risk was a sufficiently important concern to rule out plans 
that involved equities.”

It is important to note that these accounts would have been supplemental — 
though analyzing the impact of this is impossible without knowing how the 
rest of Social Security would have been balanced. (For more on this see 
“Hung Up on Words.”) There is one more similarity. Many opponents of Social 
Security reform continue to comment on how the real problem is Medicare. 
(Though few of them have actually proposed anything constructive to fix 
Medicare.) That is true today just as it was true when the Clinton 
administration pursued Social Security reform. However that does nothing to 
undermine the argument that Social Security needs to be fixed — in fact, it 
makes the argument stronger.

If a patient has been bitten by a rabid animal, you fix the cut and then 
you give him medicine. You need to start somewhere. Fixing the cut first is 
not a sign that you plan to withhold medicine in the future. The Clinton 
administration recognized this without setting off alarms on the editorial 
pages. Bottom line: Fixing Social Security is just as important today as it 
was when Clinton wanted to tackle the job — more so, in fact, since years 
have elapsed.

Given how many areas of agreement there were in the Clinton ’90s on Social 
Security reform, one would think the possibility for broad-based bipartisan 
compromise would still exist today. To be sure, the fiscal environment has 
changed dramatically, making the options more difficult. But the underlying 
problems facing Social Security remain. Perhaps the rhetorical hugs in Rome 
can serve as the starting point for turning those many points of agreement 
into a bipartisan plan.

— Kevin A. Hassett is director of economic-policy studies at the American 
Enterprise Institute. Maya MacGuineas is the director of the fiscal-policy 
program at the New America Foundation.

*   *   *