The Flaw in Bush's Plan
The Bush budget policy continues to be awful. But the recent proposal for personal accounts in Social Security is at least half- excellent. If the administration can show the flexibility to recant one key error, it may deserve to win the coming battle in Congress.</br></br>First, what's excellent? Unlike many versions of pension privatization, the Bush personal accounts are not a giveaway to Wall Street. The government would administer the personal accounts and control the short list of investment options, so salesmen would get no opportunity to push junk funds with enormous hidden fees onto unwary workers.</br></br>The Bush plan is not a giveaway to account holders, either. Pension privatization in Britain, and the leading reform proposal from the Social Security commission in President Bush's first term, involved taxpayer subsidies to those who opted for personal accounts: A policy that was supposed to fix the future budget hole actually wound up enlarging it. The new Bush proposal, by contrast, is intended to be roughly budget-neutral (although more on this later). The new proposal also takes a decent shot at protecting investors from their own folly. Unless workers explicitly demanded otherwise, their savings would go into a "life cycle" account that shifts money from stocks to bonds as they get older. That way they're protected from a possible stock market crash on the eve of their retirement. Admittedly, some high-rolling 64-year-olds will still punt on equities and get burned. But millions of poor workers who accepted the default life-cycle option would retire richer.</br></br>The leading reform proposal in Bush's first term said that individuals could set aside 4 percent of their pay (up to the payroll tax cap, currently $90,000) in personal accounts, but that the maximum anyone could set aside per year was $1,000. In his new proposal, however, the president added a promise to phase out that $1,000 cap. This may sound like an innocent change. But it turns a plausible plan into a crazy one.</br></br>The phaseout kills the progressivity in personal accounts. Under the old proposal, a worker earning up to $25,000 could divert 4 percent into his account, whereas a worker on $90,000-plus could divert just over 1 percent; the opportunity to earn superior investment returns was to be concentrated among workers who most needed it. But if Bush phases out the $1,000 cap, that progressivity will ultimately be eliminated.