Saturday, April 02, 2005

Ed Crane Memo To Karl Rove On Social Security 

TO: Karl Rove
FROM: Edward H. Crane
DATE: March 24, 2005
SUBJECT: Saving Social Security Reform

In his Washington Post article today on the emotions surrounding the Terri Schiavo case, Bob Novak inadvertently sums up the problem with the administration's Social Security reform strategy when he writes, "This is not the cold, analytical debate over Social Security." Just so. If
you're wondering why there is so little grass roots support to date for the president's plan, it is because the focus has been on green eyeshade issues such as solvency, transition costs, unfunded liabilities, and rates of return. Accountants and actuaries to the barricades!

Seriously, this should be an emotional issue about liberty and opportunity, not solvency dates. The concept of an Ownership Society is brilliant. Unlike the New Deal, the New Frontier or the Great Society, Ownership Society actually means something - something integral to the essence of America. That essence is a respect for the dignity of the individual, which is axiomatically enhanced when one has more control over one's life. That is what personal accounts provide.

You want to get people excited about personal accounts? Tell them about the 1960 Supreme Court case, Flemming v. Nestor, which explicitly says Americans have no ownership rights to the money they pay into Social Security. It is, the Court ruled, a social program of Congress with
absolutely no contractual obligations. What you get back at retirement - indeed, when you can retire and receive benefits - is entirely up to the 535 members of Congress. Where is the dignity in such a system?

In addition to more control over your life through personal accounts, all the ancillary benefits of ownership should be enthusiastically played up by the president: the pride one has in having provided for his or her own retirement, as opposed to being a supplicant of the state; the security of knowing the government can't take the money away (which they do whenever they raise the payroll tax or push back the retirement age); and perhaps most of all, the knowledge that your loved ones may benefit from your labor. Inheritability is a hugely under-exploited benefit of personal accounts. Under the current system, when you die, or when your spouse dies, the money simply disappears. What's up with that? Which opponents of personal accounts want to debate that issue? If you want to energize the grass roots, challenge opponents of personal accounts on inheritability. Why should the money go to the government and not your loved ones?

I recently undertook the masochistic task of reading the last 10 apoplectic op-eds Paul Krugman has written on Social Security for the New York Times. Not once in his rants against personal accounts does he address the issues of ownership and inheritability. Indeed, opponents of
personal accounts shy away from those issues like a vampire from the cross. I know you might counter by saying the president does mention ownership in virtually every speech. True, but mostly in passing. It is not the centerpiece of his sales pitch. For instance, in Orlando last week President Bush used the word "ownership" once, on page 18 of a 25-page speech. He never once mentioned inheritance, choice, or personal control.

I also think you're missing an opportunity by not emphasizing choice, which is also part of the essence of America . We can choose where we live, who we marry, what we drive, the insurance we prefer, but when it comes to Social Security, Congress tells us what the deal is? We have no option but to go into a system in which we have no right to the money we pay in? This is a major error the creators of Social Security made. Reform offers an opportunity to correct that error. Give us the choice to stay in the current system or to purchase real assets that we own within the system. Choice is consistent with American values. Compulsion and no choice are consistent with foreign cultures, not ours.

Another mistake the administration and most supporters of personal accounts are making is conceding that there will have to be benefit cuts under the various reform proposals. Benefits will rise under the reform proposals. Personal accounts are part of Social Security, not separate.
If history is any indication, using the most conservative assumptions, personal accounts containing stock, bond, and money-market mutual funds will grow over the years. The mix of benefits will change, but Social Security benefits including personal account will go up, not down. Nobody should concede benefit cuts. Such erroneous concessions have inhibited support for the president's proposal.

I also believe "recognition bonds" (like those contained in the Johnson-Flake bill) should be part of the debate. They create explicit obligations of the federal government where only implicit obligations now exist. They are a major reason Chile's successful program of personal accounts has survived a succession of left-of-center governments there. Without them, the battle to keep personal accounts will come up with each new Congress. With them, it's a done deal. For what it's worth, Stephen Goss, Chief Actuary of the SSA, has scored Johnson-Flake and determined it will cut the system's unfunded liability nearly in half.

Finally, with regard to the "risky scheme" arguments of opponents, I think it is ironic that the very same people who appear so concerned over the growing wealth gap in America are the one's who refuse to allow low- and moderate-income Americans to accumulate wealth. The
investment-risk argument was used in 1983 when the Greenspan Commission refused to even consider personal accounts. Yet, the DJIA is now ten times higher than it was at the peak in 1983 (adjusting for inflation and including dividends). How much longer are we going to deny lower-income Americans an opportunity to participate in the wealth creation engine known as the American economy?

President Bush has an opportunity to create a real legacy for himself. He has been heroically bold in raising this issue. But it seems to me he's been somewhat timid in the manner in which he has chosen to promote it. Personal accounts are the right thing to do whether Social Security
is solvent or not. Solvency discussions are boring, not to say uninspiring. Ownership and inheritability are inspiring. It is time you inspired the grass roots on this issue. The fact that personal accounts help traditional Democratic constituents even more than Republicans should be another opportunity to turn debate around. Sending people out with charts and figures will achieve little. Returning to the first principles of liberty and opportunity - the true reasons to support personal accounts - will work. Time is starting to grow short and I urge you to reconsider your strategy. A solvency strategy will likely lead to nothing more than higher taxes. Ownership will lead to wealth creation and increased liberty.

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