Private-Account Concept Grew From Obscure Roots
Tuesday, February 22, 2005
Twenty-five years ago, Peter J. Ferrara was a Harvard Law School student with what he called "the craziest idea in the world." In a paper he wrote before graduating, he suggested converting the government-run Social Security program into a web of private investments.
The paper caught the eye of Edward H. Crane, a former head of the Libertarian Party who had recently started the Cato Institute, which has a stated mission of encouraging "limited government." To him, Ferrara's idea wasn't crazy at all, but a way to challenge Washington's largest and most revered social program.
With Crane's backing, the proposal by the 24-year-old Ferrara began an improbable journey from the fringes of public policy into the mainstream. Today, far from its origins in the political wilderness, the notion of creating Social Security personal accounts is at the top of President Bush's domestic agenda and stands to spark the year's biggest legislative battle.
None of this would have happened without the persistence of conservative operatives, the explosive growth of the stock market in the 1990s and the eventual adoption of the idea by big business.
The story is peopled with quirky characters such as Ferrara, a brilliant and notoriously unkempt wonk, and Crane, one of the prickliest critics of Washington's bureaucracy. It also has its irony: After years of struggle in obscurity, the free-marketers are now at war with themselves. Crane, Ferrara and the business interests that have become the effort's primary financial supporters are at each other's throats over how to structure and promote the accounts.
"Ed Crane and I don't talk anymore," Ferrara said. "Cato wants to get rid of the entire Social Security system, and I don't."
Cato's privatization effort was aimed from the start not just at dismantling Social Security but also at making major inroads against what it considered an overweening central government. "Social Security," said David Boaz, Cato's executive vice president, "is the linchpin of the welfare state."
To Cato critics like the Brookings Institution's Henry J. Aaron, Cato's goal was to "topple the great monument of 20th-century liberalism."
With its roots so radical, few official Washingtonians paid Cato much heed at first. Crane, after all, was preparing to manage the also-ran campaign of Libertarian Party presidential candidate Ed Clarke, and Ferrara was just another third-year law student about to join a white-shoe Manhattan law firm.
But Crane saw promise in Ferrara's analysis and encouraged him to expand it. In his paper, Ferrara predicted that Social Security eventually would run short of cash, requiring a serious revamping. Crane paid Ferrara $5,000 to elaborate his thesis into what would become Cato's first hardcover book--"Social Security: The Inherent Contradiction."
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.