A Fascinating (And Demoralizing) Bit of “What If” Economic History

If you’re a fan of alternate-history fiction, then you’re no doubt familiar with some tried-and-true, sliding-door switcheroos include a Civil War victory by the South, Nazi Germany getting the atom bomb before America, and JFK avoiding assassination. Some compelling “what if” moments from economic history might include Ronald Reagan failing to pass his 1981 tax cuts, 1990s Washington regulating the internet, and China not joining the World Trade Organization.   

Here’s another one: What if George W. Bush’s Social Security reform plan had passed in 2005?

Fresh from a strong reelection effort, President Bush grabbed the third rail of American politics with both hands. He declared that he would make reforming America’s creaky pension system the domestic centerpiece of his second term. (“I earned capital in this campaign, political capital, and now I intend to spend it.”) 

His proposal combined two key elements: “progressive price indexing” to curb benefit growth for higher earners, and voluntary personal accounts funded by a portion of workers’ payroll taxes. The plan was ambitious yet actuarially grounded. Also: politically doomed. Opposition from Democrats was fierce (really fierce!), Republican support wobbly, and Hurricane Katrina ultimately swept reform off the agenda.

Had it succeeded, the results would have been far from the dystopian warnings of its critics. New analysis and modeling from economist and AEI scholar Andrew Biggs suggests that Bush’s plan would have extended the retirement trust fund’s solvency by a decade and closed around two-thirds of the long-term funding gap. Low- and middle-income workers — folks who rely most on Social Security — would have seen their total retirement benefits rise by 3–8 percent above those scheduled in current law. Higher earners would have received slightly less than scheduled, but still generous payouts.

More striking is what might have been politically achievable. At the time, Biggs points out, “Democrats favored raising the ceiling on earnings subject to payroll taxes so 90 percent of all wages were subject to taxation.” Combined with Bush’s reform, such a trade might have secured enduring solvency with minimal pain. A grand bargain was conceivable. It simply never came together. So that is another sliding door moment.

Year by year, the cost of inaction mounts, Biggs rightly notes. Two decades on, the trust fund is nearing depletion, the fiscal gap has grown, and the window for gradual reform has narrowed. Measures that once required only tweaks now demand sharper cuts or steeper tax hikes.

The failure of Bush’s reform drive is thus more than a historical footnote and interesting foray into alternate economic history. It’s a political parable about missed policy chances. Among the lessons in the report’s conclusion:

Reform windows don’t stay open. The Bush plan came at a rare moment of fiscal and political opportunity. Social Security was running surpluses, and bipartisan compromise was possible. Delay has since narrowed options and worsened the program’s fiscal outlook.

Narrative matters as much as math. Bush’s proposal faltered partly because it lacked a compelling story. Technical reforms like progressive indexing and personal accounts must be explained in clear, relatable terms, such as “living within our means” or “saving the surplus.” Voters respond better to narratives about fairness, protection of the vulnerable, and fiscal responsibility than to abstract actuarial calculations.

Update policy goals for a richer America. With rising wealth, Social Security should focus on the poor rather than sending large checks to high-income retirees. Other Anglosphere countries already do this, offering more targeted support. And while personal accounts funded from payroll taxes may no longer be viable, expanding private retirement savings — such as through automatic enrollment — can complement Social Security and ease political resistance to benefit spending restraint.