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Editorial ¦ February 11, 2005
GOP Elephants Crying Wolf

By Richard Steier

When President Bush's discussion of his plans for Social Security early in his State of the Union address Feb. 2 was punctuated by groans and cries of "No!" from the floor of Congress, I thought maybe the protesters who infiltrated the Republican National Convention had once again crashed the party.

It turned out, however, that the protests came from Democratic members of Congress vocalizing their disagreement with Mr. Bush's claim that the system would be bankrupt by 2042 unless dramatic action was taken.

The break with protocol by those Democrats was a graphic reminder that the battle over Social Security's future is at least as much about politics and ideology at it is about substance.

White House's Battle for Dominance
It could be argued that the opening shot in the coming war between the Bush White House and those in Congress who don't buy the President's prescription of personalized retirement accounts was fired by one of the President's key political advisors 30 days earlier.

A Jan. 3 memo by Peter Wehner, a top deputy to Bush political guru Karl Rove, framed the debate in nakedly partisan terms, stating, "For the first time in six decades, the Social Security battle is one we can win-and in doing so, we can help transform the political and philosophical landscape of the country."

It's significant that when the e-mail message from Mr. Wehner became public, the White House did not decry its having been leaked. Instead, the President's chief spokesman, Scott McClellan, said it was sent to "opinion leaders" as an outline of "the challenges we face and the importance of seizing this opportunity to strengthen Social Security."

Mr. Wehner, however, was going well beyond explaining how to save a supposedly shaky government program.

In couching it as the best opportunity for change in the program in the last 60 years, he was taking the position of the arch-conservatives who opposed Social Security from its outset 70 years ago as part of President Franklin D. Roosevelt's New Deal.

His remark about transforming "the political and philosophical landscape of this country" could be read this way: if you undercut the essence of the best and most-enduring aspect of FDR's New Deal, what do Democrats have to offer the American public as an example of positive ways in which they've used their power while in the White House?

The President made the need to fix Social Security sound urgent during his speech while offering only generalities about what he has in mind. The fewer specifics you attach to a program, the tougher it is to dissect its weaknesses.

And in promising that the personal retirement accounts he favors would allow participants' investments to "grow over time at a greater rate than anything the current system can offer," he was dangling the prospect of Americans making their own choices for expanding their retirement income rather than yoking them to the no-risk investment practices of the Social Security Administration.

Counting on a Memory Lapse
It sounded very alluring, unless you stopped to consider why FDR had created the Social Security system in the first place: as a response to the 1929 stock market crash that left millions destitute after they placed their faith, as well as their savings (and sometimes money they didn't actually have), in the market.

There are legitimate reasons to doubt that there is any problem facing Social Security over the next 40 to 50 years, never mind a crisis that requires drastic solutions. And more than a few economists and actuaries argue that there is no financial scenario projected by the President and other advocates of personal retirement accounts that would make the system work that would not also leave Social Security flush if it was left in its current state.

Mr. Bush delivered his speech well last Wednesday, his characteristic earnestness accompanied by a self-assurance not always evident in his public appearances.

He offered comfort to those Americans who are 55 and older by saying, "The Social Security system for you will not change at all." But he warned that it "has serious problems that will grow worse with time. People are living longer and drawing benefits longer."

Because what was once a ratio of 16 employees paying into the system for every 1 who was collecting benefits has now compressed slightly more than 3 to 1, the President said, "In 2018, Social Security will be paying out more than it takes in."

Fifteen years later, he said, the system would have a shortfall of more than $300 million. "By 2042, that system will be bankrupt."

He based that projection on the "intermediate" economic model used by the Social Security Administration, who say that if it came to pass the system at that point could afford to pay just over 70 percent of the expected benefits.

A CRISIS OR A POLITICAL CHARADE? President Bush has warned that Social Security could be bankrupt in four decades, but independent actuarial consultant David Langer says the system is in no danger and still symbolizes 'what government can do when it's done right.'



A Faulty Model
But David Langer, a Manhattan-based actuarial consultant who specializes in Social Security, said the day after Mr. Bush's speech that this scenario is overly pessimistic and that there is no crisis at all in the system.

He went beyond the claims of Democratic elected officials who contend that the system needs some tweaking but not a major overhaul. "I think the Democrats are afraid that if they said there's no crisis, they'd get laughed at," Mr. Langer said. "It all points to the tremendous success that the conservatives have had." He noted that right-wing think tanks like the Cato Institute and the Heritage Foundation have been saying the system is "in need of a fix for 25 years."

But over the past decade, Mr. Langer said, the worst-case projections by Social Security's actuaries have been stunningly wrong, and its intermediate guesses have also been off the mark. Its "optimistic" forecasts for that period have actually been an accurate guide to the system's actual performance.

"There's no actuarial problem with Social Security," Mr. Langer said.

There are, he added, serious flaws in the personal retirement account concept promoted by Mr. Bush, which is why he believes the President has tried to avoid being too specific about what it would entail.

Proponents of the idea point to its use in Chile, Sweden and Britain, but Mr. Langer said, "All those programs have problems." He noted that insurance companies in Britain recently agreed to pay $18 billion to settle a class-action suit brought by workers who said they were misled into believing that their own plans would be wiser investments than the one offered by the British Government.

No Market Correction
Mr. Bush first raised the idea of personal accounts during the 2000 presidential campaign, at a time when the stock market was still booming and it seemed a better bet than banking on the smaller, steadier yield from government bonds. The market's crash since then-its impact can be seen in the drastically increased pension contributions being made by the city to cover shortfalls in investment returns even though last year was a very good one for the five pension systems-has not discouraged Mr. Bush from plowing ahead with the idea.

But Mr. Langer said that the case for personal accounts to succeed in improving retirement funds for Americans as a whole depends on market returns that are wildly unrealistic. "The market's already over-priced," he said, referring to the formula under which economists add the dividend rate being paid by companies to the estimated increase in gross domestic product to gauge their proper future value.

Those who point to the greater long-term growth of stocks' value compared to that of government bonds in recent decades as proof that personal accounts would be a better choice for younger individuals are not looking at the full equation, Mr. Langer argued.

Overlooked Value
In a piece he published five years ago in the Christian Science Monitor, he said that a 30-year-old couple could virtually triple its investment in Social Security over the next 35 years. The key to this projections was his surmise that the money they were paying in Social Security taxes would be offset by the benefits the system was paying to their aging parents, removing the need for them to give parents financial assistance. Under that model, he wrote, an investment by the couple of $140,000 in the system would yield them $410,000 in free-and-clear payments.

"This is what government can do when it's done right," he said. Those who have argued that Social Security is a sophisticated Ponzi Scheme under which those paying in last could wind up losing their money are distorting what the program is about, Mr. Langer said.

"Unlike Ponzi, nobody has become rich on Social Security," Mr. Langer said.

Under a system of personal retirement accounts, the name of the Bush Administration opted for once it discovered that describing the change as "privatizing" had a negative connotation for the majority of Americans, Mr. Langer said, there would be only two sure winners. "A lot of Wall Street people will become very rich, and insurance people as well," referring to the fact that insurers have increasingly invested in the stock market.

Currently, Social Security is robust enough to have nearly $2 trillion invested in U.S. Treasury bonds, essentially a loan to the Federal Government, Mr. Langer noted. In contrast, most economists believe that creating personal retirement accounts will cost the Federal Government about $2 trillion over the next 10 years. Robert Rubin, the highly regarded former U.S. Treasury Secretary under President Clinton, has projected the cost for the following decade at $4.5 trillion.

Numbers Don't Add Up
The President said his budget plan would "cut the deficit in half by 2009," not incidentally right after he leaves office. Since a major component of the budget would make his past tax cuts permanent, it's tough to see how the administration's numbers add up. The likelihood of ballooning deficits could eventually require that either basic Social Security benefits be slashed or the eligibility age be increased. Bush officials have already made clear that an increase in payroll taxes won't be part of their agenda for the system.

Currently, employees pay 6.2 percent of earnings up to $90,000 into Social Security, with employers matching that percentage under the payroll tax. If the Bush plan is adopted, by 2011 employees could invest nearly two-thirds of the money they now pay in Social Security taxes-up to 4 percent-into their private accounts. They could invest in a mix of diversified funds, with their plans administered by the Federal Government. Private fund managers would be responsible for making the investments.

At Market's Mercy
Even with these protections against wild speculation, account-holders would face the same prospect of looses from market down-turns as traditional investors-who, it should be noted, at least have the protection of full Social Security benefits to cushion a bad run of luck. However sound a long-term investment a conservative stock portfolio might be, it is no guarantee against the misfortunes of heavy losses right at the point that an employee is ready to retire.

It was with that possibility in mind that Nevada Sen. Harry Reid, leader of the Democratic minority in the Senate, branded Mr. Bush's plan "Social Security Roulette" immediately after the State of the Union speech. Referring to both that proposal and the vague remarks Mr. Bush made about soaring health-care costs, Mr. Reid said, "Mush of what the President offered weren't real answers."

Democrats in Congress hope that there are enough Republicans who are wary of Mr. Bush's plan-and feeling heat from their constituents on the issue-to be able to head it off. The battle to come is not simply about the future of the two parties and whether Republicans can use the issue to increase their dominance in the Federal Government. It also will decide whether we are ready to expose all American workers to the same, slightly better-regulated market forces that 70 years ago made the Social Security safety net necessary in the first place.

Spitzer Skeptical
Two days prior to Mr. Bush's speech, State Attorney General Eliot Spitzer told the National Press Club that the President had no credibility on the issue. Mr. Bush had opposed efforts to strengthen Federal laws against the financial fraud that permeated Wall Street during the President's first term and made Mr. Spitzer a national figure for his success in exposing it.

He chastised the administration for "saying take the safety net that we have and invest it in a system that was fundamentally broken before others stepped in to try to save it. Where would we be if those who are retiring had had their money in Enron and Worldcom?"

Mr. Spitzer clearly is a partisan on this issue. The 77-year-old Mr. Langer admits that beyond the numerical calculations that convince him that Social Security is not at risk and that Mr. Bush's plan is unworkable, he has a sentimental bias favor of the current program, having grown up during the Depression.

But one Certifies Public Accountant with enough political detachment to refer to the recent election as "a failed candidate vs. a failed President," said of Mr. Bush's plan, "It's beyond my understanding in terms of how it succeeds. If you pull money out [of the system] and you keep taxes low, I don't know where the money [to fund it] comes from unless you borrow money. And that makes interest rates go up.

"I'm not sure how the Republicans get away with things like this and the Democrats can't," he continued. "I guess that's why the Democrats are the minority party."


© 2001 DAVID LANGER COMPANY, INC.