From: Rakesh Bhandari (bhandari@BERKELEY.EDU)
Date: Fri Mar 04 2005 - 12:50:47 EST
New Contract In Bush's 'Ownership Society,' Citizens Would Take More Risk Beyond Social Security Moves, His Vision Encompasses Health Care and Housing Shrinking the Safety Net By JACKIE CALMES Staff Reporter of THE WALL STREET JOURNAL February 28, 2005; Page A1 WASHINGTON -- President Bush's campaign to revamp Social Security is just the boldest stroke in a much broader effort: To rewrite the government's social contract with citizens that was born of Franklin Roosevelt's New Deal and expanded by Lyndon Johnson's Great Society. In what Mr. Bush calls an "ownership society," Americans would assume more of the responsibilities -- and risks -- now shouldered by government. In exchange, the theory goes, they would get the real and intangible benefits of owning their own homes, controlling their retirement savings, and using tax credits or vouchers to shop for education, job training and health insurance. The emphasis would be on the individual, supplanting a 70-year-old approach in which citizens pool resources for the common good -- and government doles out benefits. In the Bush vision, the nation's social safety nets would still exist, but on a smaller scale, targeting the most needy. Others would move to private-market alternatives of their own choosing. The president's policies, his advisers say, reflect his deeply held belief that "ownership" has the power to transform people, just as he feels transformed by a midlife decision to quit drinking and embrace religion. No program better exemplifies the longstanding social compact than Social Security: Workers are taxed to pay benefits to current retirees and the disabled, and expect to be helped by future generations. But with fewer workers supporting swelling ranks of retirees, the program by midcentury won't be able to pay full promised benefits. That is the problem Mr. Bush wants to fix. He calls it "reforming great institutions to serve the needs of our time." Yet the centerpiece of his fix -- letting workers divert a third of their 12.4% payroll tax to personal accounts, which they could invest, spend in retirement or pass on to heirs -- won't help Social Security's long-term solvency, the president acknowledges. That, he says, will require separate reductions in future benefits. His private accounts have another purpose. "When more people own something, the more they'll have a stake in the future of this country," he said recently in a speech. He's pursuing this agenda on other fronts as well. "We will widen the ownership of homes and businesses, retirement savings and health insurance," Mr. Bush said in his inaugural address in January. "By making every citizen an agent of his or her own destiny, we will give our fellow Americans greater freedom from want and fear, and make our society more prosperous and just and equal." In health care, Mr. Bush is pushing Health Savings Accounts, which combine low-cost, high-deductible insurance policies, along with private accounts to cover smaller expenses. Such accounts allow people to pocket savings if they don't go to the doctor. In housing, Mr. Bush hopes to help Americans buy homes, while shrinking government's role as landlord to the poor. In education and job training, he pushes vouchers and tax breaks for savings accounts that individuals can tap to buy services in the marketplace. The president's vision goes beyond Ronald Reagan's. The late president tried to make government smaller, not different, and largely failed. In 1983, the last time Social Security was changed, Mr. Reagan agreed to reduce benefits and raise taxes without fundamentally changing the system. But he faced a House of Representatives controlled by Democrats, protective of their New Deal legacy. Like FDR and LBJ, Mr. Bush enjoys a Congress led by his party. "We have it within our grasp," White House adviser Peter Wehner wrote in an e-mail to conservative allies earlier this year, "to move away from dependency on government and toward giving greater power and responsibility to individuals." Critics say Mr. Bush's vision is blind to economic risks facing Americans, especially lower-income workers. William Gale, a Brookings Institution economist, dismisses the president's agenda as "the Dismantling-the-Safety-Net Society." Some applaud his rhetoric, but say the president's policies -- heavy on tax breaks -- don't broaden ownership, but favor the well-off. The poorest workers, exempt from income taxes, can't take advantage of tax breaks for savings. Eugene Steuerle, a Reagan-era Treasury official now at the Urban Institute, titled a recent analysis, "An Ownership Society, Or A Society For Those Who Already Own?" According to the White House, Mr. Bush first used the phrase "ownership society" in a Feb. 28, 2002, speech on Social Security. Only last year, while running for re-election, did he elevate it to the theme for his second-term domestic agenda. The idea, says Glenn Hubbard, an economic adviser during Mr. Bush's first term, is that ownership "changes behavior." The president's philosophy reflects a libertarian, free-market bent common to Texas and its small-town Petroleum Clubs, made up of local business leaders. As far back as the young oilman's losing bid for Congress in 1978, Mr. Bush proposed carving private accounts from Social Security. After his defeat, Mr. Bush went back to the oil business, and then became part-owner of the Texas Rangers baseball team. His own financial risks and business failures through the 1980s were cushioned by investors drawn from his family's circle. Through the 1980s and early 1990s, up-and-coming Republican conservatives such as future House Speaker Newt Gingrich and Congressman Jack Kemp, who later became housing secretary in the first Bush administration, were popularizing "empowerment" initiatives and a "conservative opportunity society" to shrink "the welfare state." In Britain, Prime Minister Margaret Thatcher was overhauling state pensions and selling public housing to tenants. Their ideas -- shrinking government and cutting taxes so individuals would fend more for themselves -- were the basis of Mr. Bush's thinking, according to past and current advisers. In the 1990s, a movement was growing on both sides of the political spectrum, based on the belief that government should promote ownership of assets among the poor, instead of only providing income through bureaucratic programs. Both sides agreed the status quo discouraged recipients from acquiring assets, by cutting off benefits, and left families mired in poverty for generations. With the 1996 welfare law, Democrat Bill Clinton and a Republican Congress agreed to set time limits on benefits and require able-bodied recipients to work. That galvanized thinkers on the left and the right to press for subsidies, government matches and tax breaks to encourage the poor to save and invest. Welfare reform also marked a move of the pendulum away from traditional New Deal social programs. The change coincided with an unusually strong economy, which helped many of those moved off welfare to find jobs. Though a debate over its long-term effects continues, the reform now has survived one recession without provoking the kind of political or social backlash that some predicted. The change was a step toward a changed, and somewhat reduced, government role. At the time, George W. Bush was governor of Texas and inviting policy wonks to Austin to discuss a range of issues as he prepared to run for president. "He said, 'We've done welfare reform. What are the next things to help people as they move off welfare?' " recalls economist John Weicher, who attended one session and is now Mr. Bush's Federal Housing Commissioner at the Department of Housing and Urban Development. "He saw homeownership as one of the next logical steps to get into the middle class." Here's a look at some of the ways Mr. Bush would put his ownership society into practice. Social Security The president's plan for individual accounts is a major departure for a program designed as social insurance against the risk of destitution. Mr. Bush argues private accounts would allow workers to earn more through investments than they would receive from Social Security, especially after traditional benefits are reduced to make the system sustainable. His plan would limit choices to a small menu of stock and bond mutual funds. Backers argue that, over time, market returns exceed those of Treasury bonds in which Social Security funds are invested. Opponents counter that Mr. Bush would weaken Americans' retirement income, by making the one guaranteed benefit dependent on economic and financial market conditions. Private accounts don't only appeal to conservatives. Half of Americans have no stake in financial markets, despite the spread of Individual Retirement Accounts and 401(k) accounts. "This could be a great opportunity to build assets for the poor," says Ray Boshara at the New America Foundation, a nonpartisan think tank known for its research on private accounts to fight poverty. But, he says, the government would have to make matching deposits to allow low-income workers to build adequate investment accounts -- something Mr. Bush isn't proposing. "Thus far, I don't see the incentives for poor people to save and build sufficient assets," he says. Though the president says he sees a continued role for Social Security, Democrats insist his goal is complete privatization and fear a partisan motive as well. Conservative activist and White House ally Grover Norquist, for example, says more stock owners would mean more Republicans, making the party "a true and permanent national majority." He adds: "Obviously Social Security is the key to getting this done." Home Ownership Though the New Deal was mainly about big federal relief programs, it gave rise to the 30-year mortgage, which allowed millions of Americans to acquire their single biggest asset -- a home. Through the mortgage-interest deduction, the tax code provides a huge subsidy for home ownership. In 1948, it became a federal goal that everyone should have a suitable place to live, which led to public housing and rent subsidies for the poor. Mr. Bush signaled a new course in an April 2000 speech in Cleveland. For the government, he said, "It makes a lot more sense to help people buy homes than to subsidize rental payments forever." For the individual, owning a home "is different from renting. Suddenly you belong somewhere. Just like that, you're not just visitors to the community anymore but part of it -- with a stake in the neighborhood and a concern for its future." The percentage of American families who own homes is a record 69.2%, up from 67.5% when Mr. Bush took office. For first time, a majority of minority families own homes. Low mortgage rates are the chief reason. But the president takes credit as well. His American Dream Downpayment Initiative of 2003 has subsidized down payments that allowed about 4,000 low-income families to buy homes, the administration says. New federal rules press mortgage giants Fannie Mae and Freddie Mac to make more funds available in underserved areas. A new program permits low-income people to use federal rental vouchers toward a home purchase, though the administration says finding willing lenders is a problem. Mr. Bush has failed to get Congress's approval for his proposal to allow the Federal Housing Administration to let first-time buyers purchase a home with no money down; currently a 3% down payment is required. Nor has he gotten fellow Republicans to adopt a proposed tax incentive for builders that construct affordable homes in neglected areas, similar to an existing break for rental construction. They say he hasn't pushed it. But for low-income renters, the situation is getting tighter. Spending for rental vouchers isn't increasing enough to cover rising housing costs, or the number of families seeking help. Mr. Bush's budget request for fiscal 2006 through 2010 would, by the final year, leave the government able to fund vouchers for 370,000 fewer families than this year, according to the Center on Budget and Policy Priorities, a frequent critic of the president's policies. At the same time, the federal government and local housing authorities are steadily cutting back on the stock of public housing. "This is the most radical change in national housing policy since the New Deal," says Sheila Crowley, president of the National Low-Income Housing Coalition. She says many low-income families are better off renting, given the instability of their jobs, their vulnerability to predatory lenders who end up with the houses if owners fall behind, and the scarce supply of affordable homes. When the 2006 budget came out earlier this month, Housing Secretary Alphonso Jackson said it "reflects some of the tough choices we must make to continue meeting our nation's key priorities. Our commitment to expanding economic opportunity through homeownership continues and we will make certain we house and serve those who are most vulnerable." Health Care For decades, the government promoted employer-sponsored health insurance for workers, and Medicare for retirees and Medicaid for the poor, based on the share-the-risk model of group insurance. Mr. Bush now seeks to move to a system in which individuals shop for health care much like anything else, seeking the best prices and products among competing providers. Such competition would help restrain rising health costs, proponents say. The key: Let people keep the money set aside in a Health Savings Account -- created as part of the 2003 Medicare law -- so they have a reason to use health care more judiciously. "Hopefully...when I get to be an old guy, my HSA will be bulging with money," Mr. Bush told an audience recently, "and I will be comfortable in the security of retirement because my HSA will be a part of...other options to provide good health care for me and my family." Opponents fear employers will take advantage of the accounts to shift more costs to employees, and that only the healthiest and wealthiest will open accounts. Others would stick with conventional group insurance, which would become more costly. A study by the Employee Benefit Research Institute, a nonprofit, nonpartisan group, found that HSAs are more attractive to individuals than to families, and that the potential to build retirement savings "is limited." It cast doubt on the ability of such savings accounts to drive down health expenses because a small fraction of people -- the oldest and sickest -- are responsible for most costs and can't effectively shop for care. The administration doesn't see HSAs replacing other health-care options, whether conventional private insurance or the financially stressed Medicare and Medicaid programs. To make the idea more attractive to the poor, Mr. Bush proposes an annual government contribution of up to $1,000 for eligible low-income families, and a $2,000 tax credit to help buy the companion insurance policy that covers major medical expenses. But as with much else, budget deficits will be a big hurdle to passage in Congress. Write to Jackie Calmes at jackie.calmes@wsj.com2
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