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Oregon’s Revolt Against Social Security

by Steven Hayward
Thursday, January 1, 1998

The conventional wisdom holds that nothing scares Washington politicians so much as the subject of Social Security reform, the so-called third rail of American politics: "Touch it and you die." While Washington politicians cringe, however, rising grass-roots pressure may force Social Security reform from the bottom up.

This grass-roots revolt has begun in an unlikely place: Oregon, where "Rockefeller Republican" is still a term of admiration. In May, the Oregon legislature overwhelmingly passed a resolution calling on Congress to create a waiver process that would allow Oregon to "opt out" of the Social Security system and provide individual retirement savings accounts to its citizens. Not just public employees, but every worker in the state. Following the vote, the editors of the usually liberal Oregonian newspaper gave the resolution a cautious thumbs-up: "In its current incarnation, Social Security is headed toward insolvency, and it’s clear that Congress must do something soon. . . . And if [reform] happens, Oregon—by declaring its willingness to forge ahead on its own—would be right to claim some of the credit."

Federal waivers are nothing new for Oregon. The Beaver State won federal waivers for its controversial Medicaid plan and for welfare reform. The idea for a Social Security waiver began when Jose Pinera, the architect of Chile’s privatized Social Security system, visited the Cascade Policy Institute in Portland in June 1996. Pinera’s Chilean success story thrilled listeners who wanted to do more than simply join the chorus begging Washington to pay attention. Why not seek a federal waiver?

Of course, the federal government doesn’t grant waivers from Social Security. Any such waiver would require the statutory blessing of Congress. Oregon’s congressional delegation was unenthusiastic, so reformers asked the state legislature for a nonbinding resolution of support for the idea.

Steve Buckstein, the president of the Cascade Policy Institute, found the ideal champion in the legislature: Republican and Senate Majority Leader Gene Derfler, a 73-year-old retired small businessman who actually receives Social Security benefits himself. Derfler explains his enthusiasm for the idea by observing that "if you ask any young person if they expect to collect Social Security when they retire, most will say ‘no.’ It is not a fair situation. The federal government is not going to address the problem—they have their heads in the sand. The answer will have to come from the states, as it did on welfare reform. We would like to have the opportunity to implement a state plan."

Overcoming Resistance

Derfler admits that his constituents resist the idea when they first hear it, thinking that they already have money earmarked in the federal Social Security trust fund. "But once they understand that we have a pay-as-you-go system that is going broke and that the private alternative is actuarially sound and will work," he says, "they change their minds." Derfler and his legislative colleagues hope to have a plan ready soon to present to Governor John Kitzhaber and the Oregon congressional delegation.

With the help of Randall Pozdena, a former Federal Reserve Bank economist, the Cascade Policy Institute has generated several plausible projections for the privatization plan. The institute proposes placing each worker’s payroll taxes into his own "Oregon Private Retirement Account," which would funnel the money into private investment vehicles such as stocks or mutual funds that would likely yield a higher return over time than the current Social Security system. The idea of a Social Security opt-out waiver for states may be more of a political strategy, however, than a serious policy proposal.

Some critics of the Oregon opt-out strategy worry that it undermines the leading conservative plan for Social Security privatization, which would allow every worker in the nation to own his own retirement account. Although the Oregon plan would provide its employees with just such an opportunity, other states that seek Social Security waivers in the future might choose merely to run miniature versions of the current federal, pay-as-you-go program. Hence the conservative rallying cry of devolution may not be the best way to advance reform of Social Security based on privatization. "We don’t really envision changing Social Security on a state-by-state basis," Cascade’s Steve Buckstein admits. "What this really does is put pressure on Washington to address the problems with Social Security and make reforms itself."

But even as a political exercise, the Oregon opt-out is forcing public officials to think hard about how the process of privatizing Social Security would work. The transition to individual state plans would be bumpy, but many of the problems faced by the states would also face the nation if it privatizes Social Security.

The Hurdles

Any state plan for opting out of Social Security would have to address a number of transition problems. Oregon would have to assume its pro-rated share of the nation’s unfunded obligation for current benefits and also pay the Social Security benefits due to its own current recipients and imminent retirees. (Older workers will not have time to accumulate enough savings to equal or surpass the level of Social Security benefits.)

Assessing a pro-rated share of the existing liability for Social Security may be the knottiest problem for the federal government and many states. The federal government would be loathe to give up the payroll tax revenue from high-income, high-employment states such as Connecticut that, in effect, subsidize other states with high numbers of retirees, such as Florida. And states like Florida would hesitate to assume their share of Social Security liabilities. Oregon’s ratio of payroll taxes to payout appears to be nearly even, so its withdrawal from Social Security would not affect the national Social Security fund balance.

The Cascade Policy Institute proposes that benefits to current and imminent beneficiaries be paid for by maintaining the current payroll tax on employers for 23 years and placing those funds in the same higher-return investment pool as the other private accounts. Conservatively assuming a 3 percent real rate of return, the plan would be able to pay current and imminent Social Security recipients. Under these assumptions, individuals enrolled in the new plan would eventually enjoy retirement benefits 10 percent higher than Social Security; at a 5 percent real rate of return, they will enjoy 50 percent more income than Social Security would offer.

Fifty State Plans?

A number of issues still need to be resolved before Oregon’s state opt-out plan can be considered realistic. For instance, what safeguards and restrictions on retirement savings investment will be necessary to prevent fraudulent or imprudent investment? And what would happen to workers who move into or out of Oregon? Workers leaving the state might face the prospect of losing some of their retirement savings unless Oregon persuades Social Security to allow workers who leave the state to remain enrolled in Oregon’s plan.

The prospect of each of the states negotiating with the federal government, or with each other, over how to reconcile 50 retirement plans with a mobile work force begs the question of whether the state-by-state opt-out approach is the best way of reaching the ultimate goal of allowing individuals to own their own retirement plans. But the opt-out strategy is a good way for state-based think tanks and grass-roots organizations to join the reform bandwagon and bring the issue to the attention of the public. The American Legislative Exchange Council is recommending the Oregon resolution as model legislation for other states, and policy groups in several states, including Minnesota, Indiana, South Carolina, Alabama, Kansas, and California, have expressed interest in emulating Oregon’s resolution.

Moving the idea ahead will certainly require more states to bring pressure on Congress to enact a waiver process. Derfler and other Oregon legislators have been in contact with members of Oregon’s congressional delegation. Senator Gordon Smith and Representative Denny Smith have expressed support for the idea, but have no plans at present to introduce legislation or push for hearings. That third rail is still glowing in Washington.

For more information or for a copy of Randall Pozdena’s report, contact the Cascade Policy Institute at 503-242-0900, or at its Web site: www.CascadePolicy.org.