Voluntary personal accounts were proposed long ago

The following article originally appeared in the Minneapolis Star Tribune on March 13, 2005.

A Feb. 13 Star Tribune editorial disagreed with President Bush’s assertion that Social Security is not a “trust fund.” The president was quoted: “Some in our country think that Social Security is a trust fund — in other words, there’s a pile of money being accumulated. That is simply not true. … There is no trust.”

The Star Tribune editorial writers responded with: “There’s no easy way to say this: The president is wrong or is deliberately trying to mislead the American people. His careless use of language … feeds popular misconceptions that the trust fund is a myth.”

Who is right?

To answer this, one has to know what a “trust” is. In investment terms, a trust is “a legal arrangement whereby control over property is transferred to a person or organization (the trustee) for the benefit of someone else (the beneficiary).” In other words, a trust is established when an individual allows someone else to control their property for them. Trusts are made up of specific items of property — for example, money, land or items of value — that can be passed on to one’s heirs.

When we pay our taxes into Social Security, is there a separate account that holds our money in our name and that can be willed to our beneficiaries? No. The president is correct — Social Security is not a trust fund.

Personal accounts, held by individuals and able to be inherited, would be closer to the true definition of a “trust” than anything Social Security currently provides. And Americans would have had the option of personal accounts as early as 1935 if Sen. Bennett Clark had his way.

Clark, a Democrat from Missouri, saw that President Franklin Roosevelt’s Social Security plan was not a traditional pension plan with individual accounts that one could leave to a beneficiary. He believed that if the goal of Social Security was to provide retirement income for workers, then why should the federal government be given a monopoly? If a private employer could provide similar benefits, then that company and its employees should be able to opt out of the federal program.

Clark introduced an amendment that set forth this proposal, and it had a number of provisions to ensure that this alternative was financially sound. For example, funds had to be managed by an outside entity, and employee participation would have been purely voluntary.

The Clark amendment passed the Senate 51-35. Since there was no such provision in the House version of the bill, the debate over personal accounts took place in the conference committee. Under intense political pressure, Clark was eventually forced to drop his amendment in return for the promise that a special subcommittee would revise the language and take it up at a later date. The Clark amendment was never heard of again.

Seventy years ago, Clark sought to introduce personal accounts — a move that would have brought competition to the Social Security program early on. The public would have seen the difference in return between a retirement fund that they owned vs. the stagnant returns on government-managed accounts. Perhaps such a realization would have caused the government to reform Social Security long before now.

The introduction of voluntary personal accounts into the Social Security debate, an issue that is now characterized as something new and sinister, was actually an important part of the original discussion. As the study of Social Security reform continues, voluntary personal accounts should be a part of the discussion.

Imagine how different things might be if Clark had been successful.