Yes, Personal Accounts Are About Dismantling the Welfare State

Louis Woodhill

As currently structured, Social Security is a curious blend of “forced retirement savings program” and “welfare program”. Accordingly, it makes perfect sense to split out the retirement savings element into Personal Social Security Accounts (PSSAs) that workers would own and which could be invested to yield much higher returns than those offered by Social Security. Perhaps because they don’t want people to know just how much of a welfare program Social Security has become over the years, PSSAs are under furious attack from both Democrats and RINOs (Republicans in Name Only). Right now, this idea, which is central to the “Pro-Growth, Limited Government” vision of Social Security reform, seems to be losing ground. If we are to turn the tide and prevail on this important issue, we will have to start being clear and forthright about what PSSAs really are and what they are really for. PSSAs are not a solution to the problem of Social Security solvency. The Social Security “unfunded obligation”, currently estimated at $3.7 trillion, will have to be dealt with by cutting the growth rate of promised future benefits. One of the proposals currently being discussed, that of indexing benefits to prices rather than wages, would close the gap entirely. Allowing workers to put part or all of their Social Security tax money in PSSAs would, in principle, neither increase nor decrease Social Security’s “unfunded obligation”. This is because the benefits promised to each PSSA owner would be reduced in exact proportion to the tax revenues diverted to the PSSA. The worker will benefit economically to the extent that his PSSA earns a higher real (after inflation) rate of return than the government bonds in which Social Security funds are currently invested (currently 3% real). There is ample evidence that a prudent, well-diversified portfolio of stocks and bonds would easily outperform government bonds over time. Accordingly, the economic justification for PSSAs is that the higher investment returns will help workers replace the retirement income lost to the benefit reductions that are required to avoid Social Security bankruptcy. This having been said, the fundamental justification for PSSAs is not economic, but political. PSSAs would represent a major shift away from the Welfare State and toward an Ownership Society. This is the truth, and if we want successful Social Security reform, we will have to start telling this truth clearly, forcefully, and unapologetically. Under the Democratic Party of Franklin Delano Roosevelt, and during a time of unprecedented economic catastrophe, America took the first halting steps toward the creation of a Welfare State. The programs bequeathed to us by FDR did not threaten America’s basic character as a bastion of freedom, opportunity and economic dynamism. Indeed, it was the Democrats under John F. Kennedy that proposed the tax cuts that created the broad-based economic boom of the 1960s—a wave of growth that propelled man to the moon. Unfortunately, a few years later, a transformed Democratic Party led by Lyndon B. Johnson brought forth something new and foreign to the American character. LBJ called it “The Great Society”. I feel that a more accurate name for it is “The Therapeutic Dependency State”. The concept behind the Therapeutic Dependency State was that poverty was the responsibility of society, not the individual. In this model, society owed bureaucrat-administered, taxpayer-funded, welfare-based reparations to the various “victims of society”. The idea amounted to replacing government “Of the people, by the people, and for the people” with government “Of the people, by the unaccountable bureaucrats, and for the clamoring victim groups”. The Therapeutic Welfare State produced an explosion of social dysfunction. Crime skyrocketed, infrastructure investment plunged, public education declined, the military was hollowed out, and poverty actually increased. As the public began demanding a return to traditional American values, Democrats realized that their best hope of retaining power was to get as many people dependent on government as possible. They had learned that there is no more reliable supporter of the modern Democratic Party than someone who believes that their income, their social status, or (best of all) their very survival depends upon a government check. Led by pro-growth Republicans, America has been rolling back the worst elements of the Therapeutic Dependency State. Criminals have been jailed. Welfare has been reformed so that it is no longer a “career” (although, very damagingly, it is still an “entry level job”). Counterproductive tax rates have been cut to encourage growth of the private sector. The Democrats (abetted by clueless RINOs) have fought desperate rear-guard actions against every proposed reform of the Therapeutic Dependency State. Their fight against Social Security reform is just the latest of these efforts. Democrats have the same feelings toward PSSAs that vampires have toward wooden stakes. There is nothing more threatening to the modern Democratic Party than widespread private accumulation of wealth. This is why they oppose every reform that involves allowing taxpayers to put their own money in their own accounts to take care of their own needs. In the event that they can’t prevent the creation of private accounts, their fallback is to try to neuter them through “caps” on contributions and other limitations. The leaders of the Democratic Party are good enough at math to know that an aggressive implementation of PSSAs would allow many of the young people starting out today to retire as millionaires. They know the typical voting habits of millionaires and are justly afraid for the future of their party. They also know that if senior citizens are drawing most of their retirement income from their own accounts, it would be pointless to call them up three days before an election and try to scare them about Social Security. Personal Social Security Accounts are not about “destroying the legacy of Franklin Delano Roosevelt”, but they are about replacing the Therapeutic Dependency State with private, personal wealth accumulation for every American worker. This is what PSSAs will do, and this is what they are for. Let’s be honest about it and make our case to the American People.
Posted by Louis Woodhill on March 9, 2005 7:26 PM to Social Security Choice