Taking on the Biggest - It's Social Security's turn, at last

National Review, June 5, 2000 by Ramesh Ponnuru

GEORGE W. BUSH'S promise to nudge Social Security in a free-market direction will be the most important policy issue in this year's election. More than any other issue, it will determine who wins the White House. And that's just for starters. Bush's proposal has the potential to alter the course of American politics for decades to come.

How could it be otherwise? Social Security is the federal government's largest program. Receiving a check from the program is the principal interaction 40 million Americans have with the federal government. For millions more, the mailing of those checks is one of the few things the federal government does that make them view it positively. It is, symbolically, what's left of the New Deal. Agriculture subsidies and welfare were drastically overhauled in 1996, and only a small part of the country cares about the Tennessee Valley Authority.

What Bush is saying is that this relic is no longer sacrosanct. All of the other institutions that were suitable to mid-century America have had to adapt to today's more individualistic, decentralizing culture: the phone companies, the media, the academy, the churches, even the military. Bureaucracy is in retreat almost everywhere, and Social Security is no exception.

That's not the way it looked when the program was born, of course. Social Security was a response not only to the economic crisis of the 1930s, but to an economic order that threatened cherished American values. After decades of industrialization, the fiction that we were a country of self-reliant yeoman farmers could no longer be sustained. Labor and capital had become two distinct classes. Most Americans worked for others, their livelihoods dependent on vast impersonal forces they could not control or even understand.

Political scientist Charles Kesler summarizes the argument that prevailed in the '30s: "Given the insecurity built into the modern economy, government had to provide social security to save the middle- class basis of American democracy. Since people could no longer independently save for their old age, the government had to help them to do this in order to lift them to freedom." By framing the issue this way, FDR was able to sell government pensions-a policy idea imported from Europe's emergent social democracies-as an outgrowth of our best political traditions. FDR also had to resort to some deception, presenting a mild program of redistribution as though it were a form of insurance (a deception that continues to this day in Democratic criticisms of Bush).

It was through expedients such as these that FDR got credit from historians for "saving capitalism" by tempering its excesses. Class conflict between capital and labor remained a muted theme of American politics, but it never became virulent. At the same time, dependence on the state increased. The inventor of government pensions, Chan cellor Bismarck, explicitly sought this effect: "Whoever has a pension for his old age is . . . far easier to handle," he said, having become the equivalent of "a servant in the chancellery or at court." In America's more democratic circumstances, the chief political effect of Social Security was to increase popular support for the party of government.

There was, however, an alternative method of solving the labor-capital problem that had attracted interest from thoughtful businessmen from the dawn of the industrial revolution: making the laborer an owner of capital himself. Albert Gallatin, Jefferson's treasury secretary, implemented the first profit- sharing plan ever at his glass works in New Geneva, Pa., arguing that the "democratic principle upon which this Nation was founded . . . should be applied to the industrial process." The president of Sears, Roebuck and Co. testified to the Senate in 1939 that profit sharing "helps to avoid labor unrest and strikes, and gives the employee a feeling of greater security and unity of interest with the employer."

The profit-sharing strategy failed because its efficacy depended too much on the success of particular companies. Over the past two decades, however, worker capitalism has taken off as employees have gained access to capital markets generally, through mutual funds and "defined contribution" corporate pension plans. (In a defined- contribution plan, workers have a large say in the management of their accounts. In "defined benefit" plans, which used to be the norm, employers managed the accounts and promised workers a benefit based on their wage and length of service to the company.) While fewer than a fifth of American households owned stock 20 years ago, today slightly more than half do, either directly or through their pension plans.

In "The Rise of Worker Capitalism," a paper for the Cato Institute, Richard Nadler has surveyed the research on how this stockholding revolution has affected workers' attitudes. He finds that it has made them more interested in saving for the future, more productive, happier on the job, more committed to their companies, and less likely to strike or quit. They are also more likely to be reading the same business publications as their CEOs.