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Bush should move ahead with personal retirement accounts

By Steven Martinovich

The Professor January 26, 2004 - Although the debate about George W. Bush's State of the Union address will likely center around his optimism over the situation in Iraq or his Clinton-esque manner of identifying small problems and throwing money at them, one of the most important initiatives will likely be overlooked. Buried in the 5,000-word speech were two sentences that could be Bush's greatest legacy to future generations.

"Younger workers should have the opportunity to build a nest egg by saving part of their Social Security taxes in a personal retirement account. We should make the Social Security system a source of ownership for the American people."

Although the issue of Social Security has been on the backburner of late, the problems in the system haven't disappeared. Simply put, fewer Americans are going to be available to pay into a system that will be tapped into by seniors on a scale never before seen. That necessarily means that workers will have to pay more - far more - in taxes to support the overburdened program Americans have grown accustomed to, benefits will have to be cut or handed out later in life.

Rather than bemoan the problems looming, Americans should be taking this moment to remember that out of troubled times often come opportunities. With a population that is increasingly open to different solutions to old problems, politicians should be pushing for a radical rethinking of the way pension benefits are funded. Rather than attempt a band-aid, America's politicians should take the brave step of dismantling a system that will be crushed under its own weight.

Unlike the United States, Chile decided in 1981 to go to a fully funded system of personal retirement accounts managed by the private sector. Despite early predictions that the system would fall apart, labor force participation, pension fund assets, and benefits have instead grown. Today, more than 95 percent of Chilean workers have joined the system; the pension funds have accumulated $36 billion in assets; and the average real rate of return has been 10.9 percent per year.

The system has been so successful that eight other South American nations have followed Chile's example and in 1999 Poland became the first European nation to implement a partially privatized system. The results of moving to the privatized system speak for themselves. The Chilean savings rate increased to 27 per cent of GNP by the middle of the 1990s while the funds administered by the private pension funds grew to equal 40 per cent of GNP.

Experts point out that under a private system it is virtually impossible to lose money in the markets over a period of several decades. Even if returns are low over a period of twenty years, a person would do no worse than the poor returns that government administered programs will provide over the coming decades. Chile's switch to a private program also served to depoliticize a huge sector of the economy and give individual workers more control over their own lives. With one move Chile avoided the demographic bump that will hit United States and the future of the pension system began to depend on the markets and personal behavior.

If simple economics isn't enough to sway politicians, perhaps an appeal based on human rights will. The problem with government run pension programs is that they divorce work from reward and infringe upon individual initiative. Without understanding how much money it really takes to survive in those last years, people have no incentive to properly plan, leaving most to survive on the meager benefits handed out by the Social Security.

As columnist P.J. O'Rourke quipped a few years ago, "[h]aving a government that owned economic assets is what made the U.S.S.R. the success that it is today." Unfortunately that success is being repeated in the Social Security, all for the fear of simply giving back control of the future to the group it matters the most to, the people themselves. This year's State of the Union address may be remembered years down the line as the first step in making the golden years of millions of Americans much more comfortable, long after Iraq and misguided spending programs fade into memory.

Thanks for reading,

Steven Martinovich

Following in the footsteps of Barry Goldwater


By Steven Martinovich

(January 12, 2004) - Barring some catastrophe it's likely that Howard Dean will capture the Democratic nomination. There are scenarios floating around -- some more credible than others -- that see Dean's campaign collapsing but at this point none of the other candidates for the nomination seem pose much of a threat to the former Vermont governor. Though Bill Clinton started out in fifth place in 1991 before going on to win the nomination, none of the other Democrats in the race possess his charisma and innate political skills and are unlikely to repeat his feat. Simply put, it is Dean's race to lose.

The November election, however, is another matter. The same strengths that are likely to capture him the nomination are the same ones that will likely doom his candidacy. Dean has carefully crafted his message to appeal to those who are the angriest -- not only do they intensely dislike George W. Bush, they thought Clinton was too conservative. Moving away from the center, Dean has staked out positions that appeal to the left wing of the Democratic Party, much to the consternation of many who see that path ending in loss in November. Despite that, Dean now approaches -- in the words of one recent news story -- cult-like status among his supporters.

Democrats might well remember a politician from the recent past that came into an election with cult-like status among his supporters. In some ways, Dean is reminiscent of Barry Goldwater. Not that one could directly compare the two men but Goldwater also enjoyed a cult-like following in 1964 among Republicans, especially those who rejected the views of establishment candidates like Nelson Rockefeller, much as Dean supporters seem not to trust the Democratic Party. A record 3.9 million Americans actively worked for Goldwater -- twice as many as did for Lyndon Johnson who had a pool twice as big to draw from -- and yet history records a loss for the Republican.

What hurt Goldwater is precisely what is likely to hurt Dean. Goldwater was perceived as being too extreme for an electorate that demanded centrist politics after a national catastrophe -- back then it was the Kennedy assassination -- and suffered party infighting that hobbled his campaign. The other similarity the two men share is the corner you paint yourself into when you become the candidate that refuses to adopt centrist positions in a bid to capture the nomination. It may play within the party but it usually costs you later on.

The problem with being a 'cult leader' is that classic Catch 22: you can't deviate from your message for fear of alienating your core constituency and you can't draw in the center because your message is tailored to a different group. Goldwater took the honorable way out and refused to change his message and went down to resounding defeat -- so much so that it was editorialized at the time that the Republican Party could be finished for good.

That's the real problem Dean faces: Does he modify his message to appeal to that center -- one that arguably does not support the things he believes in -- or does he go down fighting with the message that's made him popular within the Democratic Party but a big underdog for November? If he chooses the path of Goldwater, does he risk the immediate future of the Democratic Party and consign it to the same fate the Republicans suffered after 1964?

Although Republicans relish a shattered Democratic Party, America needs it if only to keep the Republicans honest, assuming of course Bush wins in November. A party that faces no real opposition is one that becomes arrogant and loses its way. What the Democrats need today, and there is unfortunately no one to occupy this position, is a John F. Kennedy. In today's political landscape, a Kennedy Democrat -- one that would appeal to both Democrats and Republicans -- would be a powerful check on Republican excess. Howard Dean is not that man. He may be a 'cult leader', but that rarely translates into election gains. He would do well to learn from the example of Barry Goldwater.

Thanks for reading,

Steven Martinovich


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