The Free-Lunch Bunch

The Bush team’s secret plan to “reform” Social Security.

During the 2000 campaign, candidate George W. Bush seemed particularly confident about his ability to pay for Social Security reform. Despite independent estimates that creating the kind of “voluntarily” private accounts he envisioned could cost more than $1 trillion, Bush consistently took the position that he could reform Social Security for free, without undermining promises to baby boomers anticipating retirement over the next several decades.

Why was Bush so sure of himself? According to documents unearthed yesterday from the trove of 19,000 files given to me by former Treasury Secretary Paul O’Neill, and a bit of additional probing, candidate Bush and later President Bush believed in the “Lindsey Plan.” These documents show us what the president thought about Social Security reform at the only moment over the past three years—the fall of 2001—when he was fully engaged with this issue.

Larry Lindsey, Bush’s tutor on economics during the campaign and later chairman of the White House’s National Economic Council, devised a scheme based on creative accounting principles. Essentially, it proposed that the government would issue substantial new debt to sustain old-style benefits. This debt would be serviced and paid down by confiscating revenues from the higher returns from those opting for new-style personal accounts.

For the first nine months of the administration, this was called the “free-lunch” plan—a painless way to convert to a blended, private-accounts model. Inside of the Treasury Department and the Council of Economic Advisers, however, officials were befuddled by it. Lindsey seemed to have never called upon analysts inside the Social Security Administration to run the traps on his idea. Treasury and CEA did—and the numbers didn’t even come close to working out. But that didn’t stop Lindsey, or the president, from believing in and promoting the “free-lunch” plan. These two memos  on RonSuskind.com, which have never before been released, show what Bush and others in the White House were actually thinking about Social Security reform.

A bit of context: In October 2001, Bush was about to meet with the chairmen of his Social Security Commission before it began public deliberations. In preparation, the president needed to be briefed by his advisers about various options for reforming Social Security. The Council of Economic Advisers, headed by R. Glenn Hubbard, and the National Economic Council, headed by Lindsey, prepared a 17-page PowerPoint presentation for the president. As is clear from his faxed cover sheet, Hubbard wants to talk to O’Neill about that package before it is sent to Bush. O’Neill, however, receives the proposed 17-page briefing for Bush beneath a cover memo from Kent Smetters, a senior Treasury official and a leading specialist in Social Security reform. Smetters’ memo sounds the alarm about Lindsey’s free-lunch plan and reminds O’Neill of the central question: Is the president, he writes, “willing to live with benefit cuts (i.e. ‘pain’)?”

O’Neill and Alan Greenspan favored a more robust shift to private accounts, where the old system would stay intact for most Americans—they came up with a cutoff age of 37—and younger participants would be offered only a new system: private accounts available to invest in index funds, both of bonds and equities. This proposal, which would have acknowledged “transition costs” of approximately $1 trillion, got little traction.

On Dec. 21, the commission released its report illustrating a variety of blended approaches that included some element of private accounts. In the post-9/11 environment, the report vanished with little notice. But should the president take Greenspan’s recent suggestion and instigate a debate about Social Security again, we will now have some idea what he means by “reform.”