Bush?s Social Security plan not quite free market

Joel Mowbray

3/8/2005 12:00:00 AM - Joel Mowbray

Though President Bush deserves enormous credit for proposing real reform of Social Security, including personal accounts, it is not going to be a grand embodiment of conservatism.  In fact, it will look an awful lot like what a reform-minded Democrat might put forward.

What Bush is set to propose isn?t privatization.  It?s not even partial privatization.  Bush?s pending plan is a small step for Social Security reform, though hardly a giant leap for smaller government.

In fairness, there is no plan yet, at least not in final form.  But that?s not to say that the general direction and outlines have not been set.  They have.  It will be the most ambitious reform of Social Security ever proposed by a sitting president, but it will still be nowhere near as expansive as most envisioned it would be.

Who could blame people for getting the wrong idea?  In the State of the Union address, the president made the most compelling case any politician ever has for a free market reform of the granddaddy of all entitlements.  He appeared to rule out raising taxes, and he set the benchmark for the amount of income diverted to personal accounts at four percent?double what most experts thought would be acceptable in any bipartisan plan.

Within weeks, we learned that Bush was considering raising the income ?cap,? or the level of income subject to Social Security taxes, which is currently $90,000.  And full personal accounts would be phased in over nearly 40 years?meaning that four percent won?t be four percent for many until after 2040.

The widest gulf between rhetoric and reality, though, was on Bush?s best selling point: ?In addition, you?ll be able to pass along the money that accumulates in your personal account, if you wish, to your children and ? or grandchildren. And best of all, the money in the account is yours, and the government can never take it away.?

But if you read the fine print, the government can?and will?take it away.

Depending on a number of factors, between 60 ? 80% of the money accrued in someone?s personal retirement account will be gobbled up by the government.  Sure, the person will get it back, but only in the form of an annuity, a fixed monthly payment that lasts until death.

In the technical sense that you still receive your money, then yes, it?s yours.  But in the sense of property that we all know and love in America, ownership is about choice and control.  Forced annuitization leaves you with neither.  It also strips away your ability to leave a sizable nest egg to your children or grandchildren.

Notes one insider with knowledge on the ongoing deliberations, ?When this thing comes out, free market conservatives are going to bitch and hate it.?

White House spokesman Trent Duffy claims that forced annuitization is necessary to make the plan palatable to the public.  His argument is that the proposal will never pass Congress unless there are guarantees that every senior?no matter how wealthy in terms of net assets?has an annual income at least at the poverty line.

Every sane person acknowledges that if you have personal retirement accounts, guaranteed benefits must be cut accordingly.  It?s the method that matters.

Though not yet set in stone, it appears the White House plans to propose creating a dummy account for each person.  The dummy account would receive the same contributions as the real account, growing at 3% interest.  The final difference between the real and the fake account?which could be as big as, say, $50,000, or as small as, say, $10,000?would belong to the person.  The rest is forcibly annuitized.  (What do we call that?  Maybe quasi-privatization?)

Two problems, though, with the dummy accounts: 1) they?re mind-numbingly complex, and 2) they could easily create the very misguided perception that returns on Social Security are anywhere near 3%.  The latter point is of particular importance when the White House is making the correct case that Social Security is a bum deal for younger workers.

Then there?s the freedom thing.  If someone chooses to retire, sell his house, and move in with his children and grandchildren, why should he be forced to convert his nest egg?which he?d like to pass on in full?into a supplemental monthly payment he doesn?t need or want?  Safeguards against blowing the whole account are one thing; playing nanny to a senior citizen is another.

President Bush is definitely bold just in being the first chief executive to propose not just personal accounts, but meaningful Social Security reform.  And a happy ending is not out of the question.

Bush?s self-negotiated proposal with forced annuitization could attract enough Democrats to ensure quick Senate passage.  Knowing the House, the lower chamber would likely respond by passing a real, free-market reform package?potentially leading to a compromise worthy of the president?s stated vision.

But those are a lot of ifs.  Another is that the White House might change its mind and marry personal accounts with freedom.  But if the White House sticks with forced annuitization and the House can?t undo it, will people really support a plan so far divorced from the president?s powerful and appealing rhetoric?