Observations on the President's proposals for Social Security Reform by Peter Ferrara

January 20, 1999

Following are observations on the Social Security reform outlined by President Clinton in the State of the Union address, by Peter Ferrara, Cato associate policy analyst and co-author of two recent Cato Institute books on the issue:

"The bottom line on Clinton's Social Security reform proposal is simply this -- it is not workable, and it will not solve the problems of the program. The plan apparently relies on funding the program in part from general revenues, which simply spreads the problem to a different taxpayer pocket, as well as destroying the original, liberal, 'social insurance' foundation for the program.

"The plan also proposes that the government would invest part of the Social Security trust funds in private stocks and bonds, which would grant the government broad new powers over the economy, and is overwhelmingly opposed by the American people.

"Finally, his plan does nothing to solve the biggest Social Security problem of all -- the program has become a bad deal for today's workers. Clinton's plan at best would only enable Social Security to pay its currently promised benefits. But as has been shown over and over, these promised benefits amount to a very poor return on the taxes paid into the program. Workers would now get several times these promised benefits by investing the funds in personal investment accounts, as is increasingly being done in other countries around the world. Clinton would effectively deny workers these much greater benefits by simply leaving workers and employers to pay the same taxes into Social Security for no more than the current poor deal.

"But bad as it is, the Clinton plan still presents a challenge, and a political trap, for Republicans and their ideological allies. They cannot ignore Clinton's challenge to save Social Security and Medicare. If they are rightly to reject Clinton's proposal, they must advance a plan of their own.

"Indeed, Republicans now cannot simply propose to use the budget surplus for a tax cut. That would allow Clinton to frame the debate as saving Social Security and Medicare versus a Republican tax cut (for the rich, no doubt). That is a big loser for Republicans. In order to successfully advance a tax cut, Republicans now must also address Social Security.

"Republicans and their allies need not shrink from this challenge, however. For they have a far more popular alternative to Clinton's plan -- one that actually does solve the problems of Social Security and has proven workable in other countries around the world. That plan is to allow workers the freedom to choose to pay into a personal, private investment account in place of paying at least part of the Social Security tax. This is the way out of Clinton's trap."

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