Imbalance Sheet

President Bush’s proposal to create individual Social Security investment accounts has won a surprising vote of approval from the nonpartisan Congressional Budget Office (CBO).

The CBO analyzes budget and policy proposals for Congress, and has a reputation for being more liberal than most Republican leaders would like. But earlier this month, in a little-noticed study on the financing alternatives needed to keep the nation’s largest retirement fund solvent, the CBO clearly embraced Bush’s plan to let individuals invest part of their payroll taxes in stocks and bonds instead of the government.

In the study, CBO’s analysts said that, “assets set aside to fund future obligations are most likely to be insulated by a system in which ownership and control rest with individuals. In that circumstance, each participant has property rights and legal recourse to guard against the diversion of resources.”

The libertarians at the Cato Institute, who have long been pushing for the partial privatization of Social Security, could not have said it better.

The issue of who will do the investing and who will own the assets is a critical one in the continuing debate over Bush’s plan. While, these days, Democrats are largely opposed to the idea of individual accounts, the Clinton Administration called for investing Social Security funds in the stock market, so long as government bureaucrats did the investing and the gains went into federal coffers. Even Al Gore liked the idea.

But CBO rejects this strategy for a variety of very sensible reasons, including the chances that future administrations and future Congresses will spend the accumulated assets in areas other than Social Security. “An approach in which the government invests collectively on behalf of program beneficiaries is less likely to succeed,” the CBO report states. “If the money did not belong to individual participants, future policymakers could find alternative uses for it — to create a new benefit, fund a new program, or perhaps cover a budget gap.

“A future Congress, confronted by war, recession or other urgencies, could spend the invested resources or could run larger budget deficits or smaller surpluses that offset the effect of boosting savings,” the report goes on to say. “No trust fund, lockbox or other accounting device has yet proved effective in protecting funds that have been set aside for future commitments from the fiscal demands that arise from one Congress to the next.”

Another reason to fear government ownership of corporate stocks is “the issue of government control of businesses,” the CBO paper said.

“Holding private equities would give the government ownership rights, ownership responsibilities and the potential for involvement in a businesses’ affairs,” the CBO warned. And that could lead to government interference in business decisions that could undermine the economy.

Let’s say, for example, that one of the corporations the feds invested in decided to close one of its plants in a cost-cutting move.

“Plant closings are usually undertaken to enhance the financial health of a company; however, with the government as a stockholder, the company could be pressed to operate the plant at a loss in order to protect jobs. Pressure for a bailout or other forms of subsidy could follow,” the CBO report states.

These are very strong arguments on behalf of the president’s proposed financing reform plan. But what is most surprising is that the CBO makes little, if any, objective attempt to disguise its general support for the plan’s fundamental changes.

For example, Social Security is financed by a “pay-as-you-go approach” that “uses is current receipts to pay current benefits. Continuing that approach implies that either future taxes will have to be raised or spending promises curtailed,” the study states.

More Important Than Tax Cuts

On the other hand, “private pensions plans generally fund future obligations by investing their resources in private securities and other financial assets,” the CBO says. It adds that “the government could avoid the difficult choices of raising taxes or curtailing benefits by adopting the same practice.”

No wonder White House policymakers and their outside allies have been cheering the CBO’s conclusions and promoting the study on Capitol Hill.

Every domestic policy reform that Bush has made in his presidency-even the $1.7 trillion in total tax cuts-pales in comparison to his plan to create private Social Security investment accounts that will affect the lives of generations to come. But changes this big, which would chip away at the last pillar of the New Deal welfare state, face huge obstacles.

Democrats attacked the plan in last year’s midterm elections, believing that it was “the third rail” that would kill Republican candidates who ran on the idea. It turned out that GOP candidates who supported the reform plan won in state after state, despite a wave of vicious, demagogic TV ads by their opponents.

House and Senate hearings have been held this year to move the idea forward. It will no doubt be a central issue in next year’s presidential election, when Bush will be seeking a mandate to pass it in 2005.

Meantime, the CBO’s report represents another important, incremental step forward in the movement to let America’s workers accumulate wealth for their retirement years that no one can take away from them.