Saturday, February 26, 2005

For Bush, a Long Embrace of Social Security Plan

The New York Times
February 27, 2005
For Bush, a Long Embrace of Social Security Plan

WASHINGTON, Feb. 26 - The conservative economists and public policy experts who trooped in to brief George W. Bush on Social Security not long after he was re-elected governor of Texas in 1998 came with their own ideas about how to overhaul the retirement program. But they quickly found that Mr. Bush, who was well into preparations for his first presidential race and had invited them to Austin for the discussion, already knew where he was headed.

"He never said, 'What should I do about Social Security?' " said one of the participants in the meeting, Martin Anderson, who had been a domestic policy adviser in the Reagan administration. "On the day we talked about Social Security, he said, 'We have to find a way to allow people to invest a percentage of their payroll tax in the capital markets. What do you think?' "

Mr. Bush had long been intrigued by the idea of allowing workers to put part of their Social Security taxes into stocks and bonds. One Tuesday in the summer of 1978, in the heat of his unsuccessful race for a House seat from West Texas, Mr. Bush went to Midland Country Club to give a campaign speech to local real estate agents and discussed the issue in terms not much different from those he uses now.

Social Security "will be bust in 10 years unless there are some changes," he said, according to an account published the next day in The Midland Reporter-Telegram. "The ideal solution would be for Social Security to be made sound and people given the chance to invest the money the way they feel."

Two decades later, Mr. Bush's desire to change Social Security intersected with the promotion of private accounts by well-financed interest groups and conservative research organizations, which viewed the concept as innovative if ideologically explosive. What was once a fringe proposal has been propelled to the forefront of the national agenda in one of the biggest gambles of Mr. Bush's political career, and in one of the most concerted challenges since the New Deal to liberal assumptions about the relationship of individuals, the government and the market.

Mr. Bush has told aides that he cannot remember precisely when he was introduced to the idea of individual investing as part of Social Security, and until he ran for president he did not have a high profile on the issue. But he comes from a family with deep roots on Wall Street; his great-grandfather founded an investment bank, and his grandfather later ran Brown Brothers Harriman, one of the most prominent firms in the world of finance. His early political education included exposure to the ideas of Senator Barry Goldwater, the conservative standard-bearer who in 1964 was among the first Republicans to make a national issue of private investing as an alternative to traditional Social Security, and Ronald Reagan, who also took up the idea.

In Texas, before and during his years as governor, aides say, Mr. Bush learned about counties that had opted out of Social Security under an old federal provision and instead offered their employees investment accounts. As governor, his involvement in issues relating to Latin America piqued his interest in Chile's retirement system, which gave workers the chance to invest and became a prototype for other nations.

As he prepared to run for president, Mr. Bush sought the opinions of people who shared his belief in private accounts, including Edward H. Crane, the president of the Cato Institute, a libertarian research organization; José Piñera, the architect of the Chilean system; and even a Swedish official who helped revamp his nation's retirement program.

"My sense was that he was predisposed to go in that direction," said Mr. Crane, who along with Mr. Piñera discussed the issue over dinner with Mr. Bush and his wife at the governor's mansion in September 1997. "I was surprised by how knowledgeable he was in terms of the questions he asked."

Other visitors to Austin also said they found Mr. Bush serious about the idea, and as the 2000 presidential election approached, increasingly convinced that the issue could be a political winner. In June 1999, Mr. Bush stood on a stage in Amana, Iowa, to announce that he was running for president. At the beginning of the speech, he set out three main goals: cutting taxes, reducing lawsuits and giving Americans "the option of investing part of their Social Security contributions in private accounts."

In addressing Social Security, he waded into an issue that had been the subject of political wars since the system was founded in 1935.

In the 1964 Republican presidential primaries, Mr. Goldwater suggested that Social Security be made voluntary, saying many people would do better by investing on their own. He was excoriated for his position by his own party and in the general election by President Lyndon B. Johnson. Mr. Johnson's landslide victory over Mr. Goldwater helped cement Social Security's reputation as the "third rail" of American politics.

But Mr. Goldwater won important converts, among them Ronald Reagan, who continued through the mid-1970's to promote the idea of private investing as an alternative.

It is not clear how much effect Mr. Goldwater and Mr. Reagan had on the development of Mr. Bush's position. But Mr. Bush's father was a Goldwater supporter, and in 1963, during Mr. Bush's senior year of prep school, he had a copy of "Conscience of a Conservative," Mr. Goldwater's precampaign manifesto, according to "First Son," a biography of Mr. Bush by Bill Minutaglio.

In setting out one of the primary themes of "Conscience of a Conservative," that of individual responsibility in society, Mr. Goldwater pointed to Social Security as an example of where conservatives believed people should be "free throughout their lives to spend their earnings when and as they see fit."

Mr. Reagan clearly grabbed Mr. Bush's attention in 1978, when he backed Mr. Bush's opponent in the Republican primary for the House seat. Mr. Bush won the primary, but he remained under pressure in the general election to prove his conservative values. He ran on a platform of less regulation, lower taxes and other positions similar to those held by Mr. Goldwater and Mr. Reagan, including advocating private investment within Social Security.

Looking back at the 1978 race, Mr. Bush's aides played down any influence that Mr. Reagan might have had on his thinking about Social Security. Mr. Bush's position, they said, was partly derived from the increasingly urgent problems the system faced- it ran short of money and was nearly unable to pay benefits a few years later - and from a deep belief in private ownership and the wealth-building power of markets.

"It was never a new idea," said Allan B. Hubbard, who attended Harvard Business School with Mr. Bush in the mid-1970's and is now director of the National Economic Council at the White House. "It was always there, like tax cuts."

After Mr. Bush's defeat in the general election in 1978, another 16 years would pass before he ran for office again. During that period, the idea of private investing as part of Social Security all but disappeared from the national stage.

But the concept was becoming entrenched in the conservative agenda. Around the time of Mr. Bush's House race, Peter Ferrara, a student at Harvard Law School, was writing a 600-page paper that examined the general hypothesis advanced by Mr. Reagan and Mr. Goldwater: that in terms of return on investment, Social Security was a lousy deal compared with the stock market.

The paper came to the attention of Mr. Crane, who was then setting up the Cato Institute to promote limited government. Mr. Crane encouraged Mr. Ferrara to turn the paper into a book, which became the intellectual basis of Cato's long push, eventually joined by many other conservative and business groups, to inject private investing into Social Security.

"I wrote about it through the 1980's for every conservative think tank," Mr. Ferrara said. "The idea was to spread ownership of the idea and make it a movement proposal."

But it was not until the mid-1990's that various forces pushed the idea back onto the public stage.

One of those was the spread of private investing as a component of government-run pension systems in other countries. The approach taken by Chile had been adopted or expanded in various forms over the ensuing decade in Britain, Sweden and many developing nations.

Within the United States, workers had become increasingly comfortable with investing through 401(k) programs and individual retirement accounts, and by the late 1990's the stock market was booming, giving added allure to investing as a component of Social Security. Discussion of the concept was no longer restricted to Republican backbenchers.

When President Bill Clinton proclaimed in 1998 that it was time to "save" Social Security from the financial pressures of an aging population, he explicitly endorsed using the returns available in the financial markets to help, either by having the government invest some of Social Security's money or allowing individuals to do it.

"If there's any way we can get a higher rate of return in a market economy, while minimizing the risk, whether it's in either one of these approaches, we ought to go for it," Mr. Clinton said on July 27, 1998.

That same day, Mr. Bush met in Austin with a group of advisers that included George P. Schultz, a former secretary of state and treasury secretary; Michael Boskin, who had been head of the Council of Economic Advisers in the administration of Mr. Bush's father; and Mr. Anderson, the Reagan adviser.

That meeting grew from a less formal session Mr. Bush attended a few months earlier in Mr. Schultz's living room in Palo Alto, Calif. The gatherings covered most of the big domestic and foreign policy issues, including Social Security, and led to the establishment of an advisory system to help Mr. Bush delve more deeply into issues as he prepared for his presidential run. Over the next few years, he participated in discussions about the budgetary implications of moving to private accounts and in debates on detailed proposals.

By that time, Mr. Bush had also become familiar with what amounted to a laboratory for Social Security privatization. In 1981, Galveston and two other counties in Texas opted out of the Social Security system. They instead allowed their employees to join a private investment program, financed by contributions roughly equal to the Social Security payroll tax. That program, like the one in Chile, became a model often cited by conservatives as evidence that private accounts could work, although whether they result in a better deal for retirees is a matter of debate.

If Mr. Bush was hesitant, it stemmed from the political risks. Stephen Moore, a conservative activist, met with Mr. Bush in 1998 and found him sold on the principle of private accounts but not certain how to sell the country.

"His thought process was, how do you overcome the political obstacles to this?" Mr. Moore said.

Mr. Bush pressed ahead as if he had found the answer, but in some ways he never did. In the 2000 and 2004 elections, he talked in general about the advantages of private accounts, but he avoided details and never acknowledged in any but the vaguest of terms that putting Social Security on sound footing would involve benefit cuts.

He may be paying the price for that strategy now. Faced with the reality that overhauling Social Security will require unpopular votes, his own party in Congress has proven unenthusiastic, and Democrats have been almost solid in their opposition.

But Mr. Bush appears unbowed and no less committed to his approach than he was 27 years ago.

"I've touched it," Mr. Bush said in New Hampshire last week, referring to Social Security as the third rail of American politics. "I touched it in 2000, when I campaigned here and around the country. I touched it in 2004. And I really touched it at the State of the Union, because I believe we have a problem."