Retiree accounts gaining adherents

Email|Print|Single Page| Text size + By Charles Stein
Globe Staff / December 20, 2004

In 1978, Peter Ferrara decided to write his third-year paper at Harvard Law School on the subject of Social Security. A self-professed conservative libertarian, Ferrara argued that the system would eventually run into financial trouble and that the best way to fix it was to let people put money into personal accounts that could be invested in stocks and bonds.

A fledgling free-market think tank called the Cato Institute heard about the paper and published it the next year as a book called ''Social Security: The Inherent Contradiction." The book didn't get much attention, and even Ferrara concedes his proposals were dismissed ''as right-wing ideas."

Twenty-five years later, Ferrara's ideas are still popular among conservatives, but they are no longer being dismissed. Far from it. President Bush has made Social Security his top domestic priority, and he has endorsed personal accounts as part of fixing the system. Opinion polls suggest that roughly half the American people support the concept.

It is not clear private accounts will win support in Congress.

''I wouldn't bet the ranch," said Edward Crane, president of Cato. What is clear is that over the past two decades the idea has moved from the political fringe toward the political mainstream.

It was pushed along by a determined group of free-market true believers, who over time have changed the terms of the debate -- in part by painting a very dark picture of the finances of the traditional Social Security system.

Their cause was aided immeasurably by a development no one could have predicted: the rise of an investor culture. The bull market of the 1980s and 1990s and the spread of 401(k) pension plans created a large class of people who think of themselves as investors and are comfortable managing their own money.

''Many people see this as a matter of choice and personal empowerment," said John Zogby, a pollster who tracks the issue.

In the early days, conservatives had trouble drumming up interest in their cause.

''We had no audience for a long time," said William Niskanen an economist affiliated with Cato. Even President Reagan, a natural ally, refused to get on the bandwagon, for fear the issue was too hot politically.

But fans of private accounts didn't give up. Peter Ferrara spent the 1980s debating defenders of the Social Security system in public forums. William Shipman, another activist, estimates he has given 300 speeches in 21 countries on the merits of private accounts. Shipman, who lives in Manchester-by-the-Sea, put his ideas into a 1996 book called ''Promises To Keep."

Henry Aaron marvels at what conservatives have accomplished. ''They have very patiently and very effectively moved expert and public opinion," said Aaron, a liberal economist with the Brookings Institution in Washington. Aaron says conservatives succeeded by following the script they have used on other issues, from tax reform to school vouchers. Part of the script involves changing the language of the debate. Supporters of private accounts routinely refer to the poor rate of return on Social Security contributions. They are right -- Social Security is not a particularly good investment for many Americans. But merely describing it in marketplace terms is novel for what had been considered a social insurance program.

In an interview, Stephen Moore, president of Club For Growth, a group dedicated to electing conservative politicians, described Social Security as a ''Ponzi scheme," and a ''chain letter," highlighting the fact that the pay-as-you-go system uses contributions from young workers to pay benefits to retirees. Moore's allies often say Social Security is heading for bankruptcy.

The repeated references to bankruptcy have sunk in.

''Many people think they will truly get zero from Social Security," said Peter Diamond, an MIT economics professor who opposes private accounts. Diamond points out that even after Social Security's trust fund is exhausted, the system will still be able to pay benefits, albeit at a reduced level.

In the 1990s, support for private accounts began to build. In 1997, five members of a 13-member advisory group appointed by President Clinton came out in favor of personal accounts.

''I think we started rolling the ball downhill," said Sylvester Scheiber, a benefits specialist who served on the advisory group. The next year, New York Senator Daniel Patrick Moynihan, a longtime defender of Social Security and a prominent Democrat, also endorsed the concept.

In his 1999 State of the Union speech, Clinton proposed a variation on the theme. He advocated having the government invest part of the Social Security surplus in stocks. He also opened the door to private accounts as a separate entitlement, above and beyond the traditional Social Security benefit.

Republicans attacked both ideas as further expansions of big government.

In that same year, then-Texas Governor George W. Bush had dinner with a group of people from Cato, including Edward Crane. Crane says Bush already was sympathetic to privatization, but was concerned that it might be difficult to sell politically.

In 2000, presidential candidate Bush came out in favor of letting younger workers put a portion of their Social Security money in personal accounts. The election didn't turn on the Social Security issue. Yet the fact that Bush won convinced his supporters that public opinion was shifting. ''Bush was the first one to prove you could jump into the water and not get electrocuted," said Stephen Moore.

In the 2002 mid-term elections, a number of Republican Senate candidates, including Elizabeth Dole in North Carolina, Lindsey Graham in South Carolina, and John Sununu in New Hampshire, were elected after coming out in favor of private accounts.

The bull market also played a role in changing public attitudes. Between 1982 and 2000, the Dow Jones industrial average climbed from less than 1,000 to more than 11,000. Along the way, the number of US households with stock holdings rose to about 50 percent. Most new investors were exposed to the market through 401(k) plans, now the most common type of pension plan. In a 401(k), both employers and employees make contributions, but the responsibility for investing the money rests with workers.

Zogby, the pollster, said support for private accounts is strongest among young people, who have more faith in markets and less faith in the government than do older voters. ''Young voters tend to be libertarians, and they don't trust government to do anything," he said. ''They trust themselves."

Zogby said that in recent years the percentage of voters who support private accounts has stayed in a tight range -- anywhere from 48 to 54 percent. He points out that support for privatization did not erode much in 2001 and 2002, when the stock market declined sharply.

What remains to be seen is how firm support for private accounts really is. In the upcoming debate, defenders of the current system will stress the risks involved in investing and the high cost of paying for the transition to a new version of Social Security. The president has ruled out raising taxes, so the government almost certainly will have to borrow more than a trillion dollars.

Bush will also have to tell people how much their traditional benefits will be cut if money is diverted into private accounts. All of the detailed plans for privatization, including those generated by Bush's advisers, entail reductions in guaranteed benefits.

Conservatives have another worry: that the lack of Democratic support for private accounts could doom the initiative. ''Almost all major reforms require bipartisan coalitions," Niskanen said.

But privatization fans are nothing if not patient. Ferrara has spent the past quarter-century pushing for changes in Social Security for a variety of think tanks. He is currently with the Institute for Policy Innovation. He is excited by the prospect of victory, but he understands major changes don't happen overnight.

''When I came to Washington I realized this was going to be a long-term project," he said.

Charles Stein can be reached at

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