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Private-Account Concept Grew From Obscure Roots

The tome made Ferrara a cult hero of the emerging political right. After Ronald Reagan was elected president in 1980, Cato held a conference that featured Ferrara and drew close to 200 congressional staffers as well as Rep. Claude D. Pepper (D-Fla.), Social Security's chief protector. But Ferrara was more apprehensive than elated by the turnout. "I knew this idea was too far out for serious consideration. It needed vetting," he said.

Academics led by Nobel laureate Milton Friedman had long questioned Social Security's link to government. Harvard University's Martin S. Feldstein argued in the 1970s that the program depressed national savings, a key to economic growth. Economist Carolyn Weaver wrote a groundbreaking article for Cato in 1979 arguing that a private system might work better. But Ferrara and Crane knew that transforming theory into practice -- especially a theory as controversial as this one -- would take years.

Peter Ferrera began writing about personal accounts 25 years ago. (Susan Biddle -- The Washington Post)

_____Special Report_____
Social Security

They were encouraged in 1981 when Chile, acting without Cato's influence, added investment accounts to its retirement system. But two years later, disappointment set in when a presidential commission led by Alan Greenspan (the future chairman of the Federal Reserve) proposed extending Social Security's solvency without resorting to private accounts.

In the fall of 1983, Cato made clear that it was preparing for a protracted fight. It published a paper by Heritage Foundation scholars Stuart M. Butler and Peter Germanis that called for "guerrilla warfare against both the current Social Security system and the coalition that supports it." They compared the drive to Nikolai Lenin's effort to undermine capitalism: "Lenin well knew to be a successful revolutionary one must also be patient and consistently plan for real reform."

Any hope for rapid victory was hampered by a lack of financial backing from Wall Street. Crane said that in the early days, financial institutions routinely rebuffed his pleas for money. "The idea that they were going to promote something that Washington politicians oppose is naive," Crane said.

Nevertheless, Cato was joined by other free-market think tanks such as Heritage and the American Enterprise Institute in holding conferences and publishing books and articles about Social Security alternatives. In 1988, the concept got its first big break when former Gov. Pierre S. "Pete" duPont IV (R-Del. ) became the first presidential candidate to call for private accounts.

But the real boost came later -- during the go-go years of the 1990s. Surpluses in the Social Security trust fund mounted and the stock market boomed, creating an environment friendly to personal investing. "The big increase in the number of market participants changed the climate and made the discussion of individual accounts more acceptable," said Michael D. Tanner, director of the Cato Project on Social Security Choice.

Not by coincidence, private-account advocates soon found a public supporter in the financial-services industry. William G. Shipman, an always dapper officer of Boston-based State Street Global Advisors, testified before Congress in 1994 that the returns from private investments would dwarf Social Security's benefits. He was quickly enlisted as an emissary for Cato.

Moderate Democrats also began to toy with personal accounts as an add-on to Social Security. Chief among them was Sen. Daniel Patrick Moynihan (D-N.Y.) and, before him, Sen. Robert Kerrey (D-Neb.), who became enamored with the idea during a 1994 commission on entitlements that he co-chaired.

In 1998, President Bill Clinton and his economic advisers spent 18 months secretly discussing elements of a plan to add individual investment accounts on top of Social Security, but they abandoned it when it became clear that the president was about to be impeached.

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