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JUNIOR'S SOCIAL SECURITY PLAN
AND POPPY'S SAVINGS & LOAN SCANDAL

Privatizing Social Security Could Make that Look Like Peanuts

Both major presidential candidates are offering plans to enable working people to participate in the stock market frenzy. Both plans involve unmentioned risks for the federal budget and the economy. Significantly they highlight differences between the character of the candidates as well as the trustworthiness of their parties.

On this point Gore's plan -- Social Security Plus -- stamps him as the more prudent candidate. He would use budget surpluses to provide subsidies to help moderate income workers set up investment savings accounts without risking their Social Security retirement benefits. His plan is consistent with the Clinton-Gore strategy of using budget surpluses to help the less affluent.

The Bush strategy, still being calibrated, encourages moderate income workers to divert part of their Social Security tax payments from Social Security to investment savings accounts. It is consistent with Republican ideology which contends that everyone should have an opportunity to earn more (if they are lucky) with at least a portion of their Social Security account by investing it themselves. For those with few assets, however it's a high risk game. So he sweetens the pot by dangling the prospect of a government guarantee to offset losses. Can he be unaware that only a decade ago his father sat helplessly by as taxpayers paid upwards of $100 billion to bail out the far less risky Savings and Loan deposit insurance guarantee fund?

Any government plan which encourages moderate income families to go into the stock market breaches the wall between government and business with unpredictable consequences. But Bush's semi-privatization of Social Security is especially uncharted, for it creates a relationship where the tax collector becomes an agent of the investment counselor.

Once government encourages the less affluent to put their meager resources into stocks through a hand-in-glove relationship with the financial community business lobbyists will have powerful new strings in their bow. Will public policy decisions be public interest driven or stock market interest driven? Will stock market regulators be able to count on support from higher-ups or, will they, like the career auditors in the ill-fated savings and loan system, be checkmated by the opportunist instincts of politically appointed superiors? Will anti-trusters be able to undertake cases like Microsoft which cause shudders on Wall Street?

The all-but-forgotten savings and loan debacle of the Reagan-Bush years, once described by former Attorney General Dick Thornburg as the biggest white collar scandal in history, is a classic example of the price the public pays for cronyism which flourishes between politicians and lobbyists once that wall is breached. In that convivial environment policymakers removed the padlock from a rich government honeypot without taking into account that when there is an unethical buck to be made predators are always ready to pounce; that the public's defenses may prove to be unreliable; that the consequences can be catastrophic; and that politicians who betray their trust have little to fear if the scam embroils both parties.

Behind a bi-partisan political shield, S&L looters operated for more than six years until the insurance fund was wiped out and taxpayers were left with the mess. Under law, the government guaranteed one account per person up to a maximum of $100,000. But shrewd investors, salivating at the prospect of 18 percent government guaranteed deposits, circumvented the limit by opening multiple accounts under various names. Money hemorrhaged through this loophole year after year, as the Senate Banking committee obligingly pigeonholed legislation to stop it.

The Bush plan to semi privatize Social Security might well be called Son of S&L. Like S&L, it is ideology-driven policy, destined to nurture cronyism among economic opportunists and politicians of easy scruples. By encouraging fraternization between policymakers and Wall Street wizards Governor Bush can transform the incidental transgressions of amateurs to the level of professional sport.

The Reagan-Bush administration task force on deregulation had confronted a real problem: the inability of tightly regulated S&Ls to compete for deposits during a period of spiraling interest rates. It could have reduced the risk by authorizing new services to produce enhanced earnings.

But Vice President Bush and his colleagues saw only an opportunity to make good on the Republican promise to get government off the backs of business. So they not only lifted the regulation which had kept S&Ls safe for forty years, but they compounded that reckless decision by reducing the number of auditors who watch for banks heading toward insolvency.

This policy proved to be all accelerator and no brakes, to the point where it bordered on malfeasance. The 18 percent government insured deposits were soon flowing to risky projects which prudent banks wouldn't touch. When auditors spotted skullduggery they frequently found that an influential senator had already blocked them by meeting with their higher-ups.

Often, as in the notorious Silverado bank in Denver, where taxpayers were nicked for $1.6 billion, directors, including President Bush's son Neil, were subsequently found to have brazen conflicts of interest.

Given the strategically placed senators who were helping the looters the pressure for President Bush to look the other way must have been unbearable. How else are we to understand why he sat immobilized even after newspapers reported that two of his sons were involved?

What pressure could induce this man, proud of his New England heritage and Yale education, to forget that his first responsibility was to protect the safety of the country, come what may? What ultimately persuaded him to comply with the unsavory wishes of the Senate cabal to vest the clean-up in their man, the former Chief Counsel of the Senate Banking Committee, who had been at the helm when the S&L Titanic hit the iceberg?

As Governor Bush proposes to give Wall Street access to an even richer government fund it is sobering to remember that the political arrangements which oiled the successful raid on the S&L insurance find are still in place. This costliest of all scandals was made possible by a campaign funding system -- now more bountiful than ever -- that fosters conviviality between needy politicians and lobbyists who know that the most cost effective expenditure they make is to buy strategically placed members of Congress.

Representative Jim Leach (R. - Iowa), the ranking Republican on the House Banking Committee at that time, attributes the charmed existence of the plotters to the ability of 3,000 S&L executives to buy the Congress. A post mortum investigation -- if there had been one -- might have found it was not S&Ls alone which bought Congress.

The cabal which induced President Bush to do its bidding was so powerful that there was no day of reckoning. No post mortem investigation established who did what and why; no effort was made to reform the campaign funding system; President Bush was able to run in 1992 as "Mr. Clean"; no senator who betrayed the public trust was unseated, disbarred or jailed.

Where were the watchdog press? During the years looters were cleaning out the vault, the press played S&L bankruptcies as business news, in the financial section for readers seeking investment opportunities.

By 1988 taxpayer losses were beyond anything previously experienced by any government. Yet it was not mentioned by either party during the campaign and reporters let the participants, from President Bush down, sail through the election without submitting to the accounting that elections are supposed to provide.

When President Bush entrusted the clean-up to the Senate's man he took an unthinkable risk. Yet it was a good bet. For no reporter asked the obvious question: "Why are you going to such lengths for this man?"

On Capitol Hill the conspirators profited from an equally benign press. Unlike the fiction reports in TV entertainment shows, they had no urge to learn what went on as senators trooped through that nominee's office as the looting went on. When the Democratic-controlled Senate voted not to require a confirmation hearing the press looked the other way.

To sum up:

Governor Bush would remove the padlock from a trust fund many times bigger than the savings and loan insurance reserve. Like the deregulation of the savings and loan system, his plan is ideology-driven; the shady politics that overwhelmed his father remain in place; and in the wings are Wall Street power players who know how to extract the last nugget from a Washington gold mine.

For millions of Americans Social Security benefits will continue to be all they will have for retirement. Given his family's involvement in the S&L scandal -- both as bungling decision maker and opportunists -- Governor Bush must know the peril that will arise when he removes that padlock. What does he know about the art of governing which warrants confidence he can cope more effectively than his father?

If credibility counts, it is important that Governor Bush clarify his rhetoric. Is it an accident that he talks about "2 percent" in a way which might cause unsophisticated voters to assume he means 2 percent of 100 percent? In fact he is talking about 2 percent out of 15.5 percent, the tax collected for retirement. That's a big slice of a modest nest egg, and is not something to fudge by playing word games.

He ought to be more candid about the slippery slope that he creates. He certainly knows that influential Wall Street gurus are unlikely to be content to settle for 2 percent. In view of the S&L experience, what reason is there to believe they can be stopped before they have the whole enchilada?

Where is he leading us when he considers a government guarantee to insulate semi-privatized social security accounts from the volatility of the market? Is this a crap shoot which will make the S&L tab look like small change?

-- by Stanley Cohen, who was a reporter and news analyst in Washington for forty-four years. He has written on the savings and loan crisis for Quill, the journal of the Society of Professional Journalists. Copyrighted 2000 by The Florence Fund.

DORIS DOES DUBYA ON SOCIAL SECURITY

--by Doris in Des Moines

Question #5: If the economy remains strong, won't the financial problems of Social Security go away?

BUSH'S ANSWER: "A strong economy provides more resources to help ease the financial strain on Social Security. Unfortunately, it is impossible to completely grow our way out of the problem for two reasons. First, the demographic changes are too powerful. The number of Social Security beneficiaries will increase by nearly 40 million by 2030. Second, as the economy grows, Social Security benefits also grow, requiring more resources from the system."

FACT: I think we've been through the main objection to this one often enough: if the economy of the future is going to be this strained by demographics and inflation, then how is it going to offer us the same historical returns as it did in the past? On the flip side, if corporations will continue to make money hand over fist, then why won't any of their employees do so? Why won't real, after-inflation wage growth make up for the increasing dependency ratios? Why, indeed, wouldn't rational immigration policies help offset the "birth dearth"?

This isn't just a debate for economists and actuaries, each armed with his or her own long-term projections. This is also, importantly, a political question that Bush is ducking big time. Just the other day, for instance, I read that a for-profit charter school corporation has been doing so well lately in the state of Michigan that it is thinking about making a public stock offering. It was noted that one reason that the company is so profitable is that it pays teachers much less than the public schools do. It was also noted that the company has a lot of charter schools in Michigan because that state's laws do not require for-profit schools to participate in the state teachers' pension plan, as the public schools must. So these teachers, who aren't making much if they're making less than public school teachers, also don't have a pension benefit. The company would, however, offer the teachers some stock options if it went public.

So what happens if it goes public? Well, money flows into the company from the stock sale. The CEO undoubtedly makes a tidy sum. If the company keeps expenses down, the share price might continue to rise and investors might see a return on their investment. The teachers might even see the value of their options rise to the point where it would be worth exercising them. It's hard to imagine that that would make them enough money to retire on, given where their salaries are, but it would be something.

Now, however, the teachers are shareholders. This is a good thing, right? Well, if they demand a raise, they might get told that expenses must be kept down in order to preserve the value of the stock. Or, if Michigan voters get tired of seeing their kids' teachers screwed and demand that for-profit schools offer pensions, they might see some of those same teachers get laid off in order to make up for the increased benefit expenses, in order to preserve the value of the stock.

Fortunately for our Michigan charter school teachers, though, there's Social Security. Oh, but wait. Bush is as keen to privatize that as he is to privatize education. Would government-regulated private Social Security investment managers refuse to buy stock in companies that cut pension benefits in order to boost stock prices? What if those companies were the only ones making a big enough profit to meet that promised 7% yield?

I read a different article in the paper the other day in which some privatization cheerleader remarked that putting workers' Social Security into the market would "encourage" workers to care about what happens on Wall Street. Roughly translated, this means that it would force workers into a situation in which when they win--with real wage increases, decent benefits, and so on--they lose, and when they lose they win, at least as far as Social Security goes. I don't hear anyone suggesting policies that would "encourage" Wall Street to care about what happens to workers. At least, not from the Bush camp. All they want is more of our money, with no guarantees that we'll ever see it again. Some "prosperity." Some "security."

Question #4: Won't personal accounts rob money from Social Security and make the program go bankrupt sooner?

BUSH'S ANSWER: "Personal accounts augment Social Security by permitting workers to invest a portion of their Social Security contributions in America's prosperity. The total amount contributed under the new Social Security system is unchanged, and the higher returns earned by personal accounts will generate more resources to help finance retirement income.

"Personal accounts, as Senator Moynihan (D-NY) puts it, will bring Social Security to its 'logical completion.' This is why nearly every plan offered by both Republicans and Democrats that provides a real solution includes personal accounts. For example, the plans offered by Archer-Shaw, Gramm, Gregg-Kerrey, Kasich, Kerrey-Moynihan, and Kolbe-Stenholm all establish Social Security personal accounts. None of these proposals makes the Social Security trust fund go bankrupt sooner."

FACT: Currently, of every tax dollar paid to Social Security, about 80 cents goes to pay current retirees and 20 cents goes to buy bonds. In the years ahead, the current-retiree payout will rise to 100% of current revenue. As soon as we owe more to current retirees than we're getting from current workers, we start liquidating the trust fund. Once we sell off those government bonds that comprise Social Security's trust fund, there won't be any interest income from them to augment what we pay into the system with current tax revenue. Savvy investors know that a liquidated asset doesn't provide an income stream. That's the big "crisis" we're dealing with.

Under Bush's plan--or at least the one some of his advisers are hinting that he's "leaning toward"--of every tax dollar you and your employer send to Social Security, about 84 cents would go to the general program, and 16 cents would go into your personal private account, which couldn't be used to pay anybody else, as it would be invested in the stock market. Therefore, if we started today, 80 cents of your tax dollars would go to current retirees and 4 cents would go to buy bonds for the trust fund. It does not take Albert Einstein to notice that this means that the surplus would grow by only 20% as much as it would if we left things alone. It does not take Jeanne Dixon to predict that this would mean that the surplus would be spent much sooner than it would under the current situation.

It does no good for you hypothetical 22-year-olds to point out that in 45 years your private account money will be there for your retirement. Long before you retire, Bush's plan will have gotten us into a situation where we cannot afford to pay your parents their Social Security benefits. It worsens the forecast for the next 45 years, it doesn't improve it. Even Larry Lindsey, former Governor of the Federal Reserve and current Bush Rent-A-Brain, told the press recently that Bush's plan will stop adding to the surplus within as little as five years, and exhaust it within as little as 20 years. Alternatively, if we did nothing to Social Security, we would have a (rising and then declining) surplus for 37 years.

In what dialect of the English language would this not mean that this proposal "makes the Social Security trust fund go bankrupt sooner"? There is no way a private account system can work without "prefunding," meaning using part or all of the surplus to "fund" these accounts. And that means we have to find some other money to make the surplus whole again. Bush says he won't raise payroll taxes. Does anybody else smell "general revenue," or is it just me?

Of course, there is a way out for Bush. He has said that benefits would not be cut for "those nearing retirement," and he has said that he would not rule out raising the retirement age. He has stayed strangely silent on the subject of cost-of-living adjustments to Social Security benefits. If he quickly escalates retirement age to 70 for those of us who still have a generation at least to go until we retire, and if he makes some adjustment in our benefit levels, and if he fools around with the COLA formula in order to cripple Social Security's attempt to keep up with inflation, then he might be able to find some way to keep his private account fund-diversion from "bankrupting the system sooner." This would not, let us concede, be a case of Wall Street rescuing Social Security. This would be a case of reducing benefits to the younger baby boomers in order to be able to afford to speculate with their children's retirement money. The only generation so far protected is the baby boomers' parents. Precisely, my dear Watson. The Grey Panthers vote, with a vengeance. They didn't get to be that old because they're stupid.

On the other hand, he could divert some of those handsome 7% returns from private accounts into the trust fund to keep it alive. Let's read Bush's exceedingly weird first paragraph again. In the first sentence, he says that workers' money is "invested" in "America's prosperity," the Madison Avenue way of referring to "the stock market." In the next sentence, he says "the higher returns earned by personal accounts will generate more resources to help finance retirement income." One possible way of reading this bizarre sentence is that Bush is saying that the income from the personal accounts will be used to finance Social Security's current obligations. In other words, the income from the private accounts will be "borrowed" to pay for the public accounts. But he has already "spent" that money--on votes. He's promising individuals a 7% return on their own contributions; he's not appealing to our solidarity and generosity by suggesting that our private account returns be used to subsidize those receiving the old-fashioned kind of Social Security benefit. It's certainly hard to know how private accounts could achieve any rate of return at all if dividends were not reinvested in the stock market, but instead were siphoned off to pay benefits to current retirees. How does my money go to Wall Street and Grandma at the same time? Surprisingly enough, his website doesn't raise these questions, and so does not provide his answers to them.

CONCLUSION: Bush lies, and in this particular case he takes care to associate himself with some Democrats who lie, too. On the playground, this is known as the "but he did it too!" defense. In the adult world, this is known as the "George Bush will say anything to get elected" problem. With this kind of smoke and mirrors, somebody like The Amazing Randi could put on a pretty good show. Bush is just putting us on. If he has found a way for less money to produce more returns, and for assets to be simultaneously spent and invested, he really ought to apply for a patent. That would be worth more than the perpetual motion machine and cold fusion combined. If Bush is not offering us a shell game, he needs to offer us a balance sheet that addresses the issue of prefunding and projected benefit levels, not patriotic-sounding pap about "America's prosperity."

Question #3: Will administrative expenses consume a large share of the investment returns?

BUSH'S ANSWER: "Even after accounting for administrative costs, the rate of return on personal accounts will greatly exceed the rate of return on Social Security. There are many innovative proposals to ensure that administrative expenses are low. Some proposals address the administration of accounts, some address the way contributions are collected and distributed, and some address the range of allowable investments. One example is the Federal Thrift Savings plan, where the administrative expense is only 0.1 percent."

FACT: Since Bush suggested in his last answer that having a bank account qualifies you to be a savvy investor, I suggest a little audience-participation game at this point. Get up and go rummage through your filing cabinet or the stack of junk on your kitchen counter or wherever you keep your bank statements, and take a look at what your friends in the financial industry are charging you for the privilege of processing your checks or just holding your deposits. If looking at your statements is too depressing--I can relate--then contemplate the fact that, according to Bankrate.com, average checking account service fees nationwide are $72 per year for no-interest accounts, and $120 per year for interest-bearing accounts--most of which bear interest in the high 2% range. In major metropolitan markets, it is not unusual to find customers paying $330 a year just to have a checking account. This, in an era in which debit-card, ATM, and ACH transactions are largely replacing paper check processing--all of which, as you recall, was hyped to us a number of years ago as the kind of technological efficiency that would bring down operating costs. You might wonder why those cost savings have never been passed on to the consumer.

If you're in the 40% of Americans who own stock, you're likely to own it through a private mutual fund as part of an employer-sponsored retirement plan. You can play this game by digging out your fund's prospectus and looking for things like "sales charge imposed on purchases," "sales charge imposed on dividend reinvestment," "deferred sales charge," "exchange fee," "management fee," "12b-1 fees," and the dreaded "other expenses." You'll have to go to your prospectus for this information, since these expenses are never itemized on any statement--they are simply deducted from return on investment before it is credited to your account. Operating expenses can range from less than half a percent a year for efficient money market funds to two percent or more for high-rolling stock funds; broker commissions can be anything the market will bear, usually from 4% to 8% of transactions. If you have never read your prospectus and have no idea what your IRA or Keogh or 401(k) is actually costing you, you are Bush's dream voter: informed about the markets, but not enough to know whose hand is in your pocket and how far.

I'm suggesting that you go research some numbers on your own because Bush cannot, it appears, be bothered to do so, even though this is his Social Security plan we're talking about and he's the one who wants to be president. The only number he can come up with, as "one example" of "some proposals" you notice he is not committing himself to, is the Thrift Savings Plan's expense ratio of 0.1%. Now, by any standard 0.1% in operating expenses is a very efficient fund. If you do not happen to work for the government or the military, of course, you might not be very familiar with TSP. It's a 401(k)-style retirement plan for government and military employees. Its funds are largely indexed common stock or government bonds, which means conservative yields, no high-paid fund managers, no loads and very low transaction costs. It is administered, not for profit, by the government. Like Social Security is. The thing that needs to be privatized. Because the government cannot be trusted to manage your money. Because the private sector is so much more efficient. And innovative.

CONCLUSION: If you think that the finance industry is lobbing millions of dollars at Bush so that he can propose a privatization scheme that will be run just like the government's programs, at no profit to the financial institutions who brought you ATM fees, load funds, payday lending and 24% APR credit cards, I do have to wonder how many shares of worthless stock bought at the market high on some "contrarian" theory you have tucked away in some drawer. Bush says we're savvy investors. Yet he can't give us a prospectus that includes operating expenses and sales load information, or that even tries to estimate transition costs from a public to a semi-privatized system. (It's like a budget, George; it's got numbers in it.) Which is more likely: that Mr. I Have an MBA from Harvard cannot produce estimates of this information with the help of all of his various advisers--one of whom is a former Governor of the Federal Reserve--or that he doesn't want to and is hoping we won't notice?

Question #2: What about workers who are not sophisticated enough to make investment decisions?

BUSH'S ANSWER: "In reality, workers manage their own financial affairs all the time. Most Americans have savings vehicles such as bank accounts, and nearly half own common stocks or mutual funds containing stocks. Nearly 90 percent of government workers who have the option of investing in personal accounts through the federal thrift savings system do so.

"Even so, workers would not have to actively manage their personal retirement accounts, but would instead choose among a set of diversified portfolios. Workers would become more sophisticated through education and experience, but they would not need detailed knowledge of specific stocks. The government might even offer a 'very low risk' option in accordance with safety and soundness standards."

FACT: Depositing money into a checking or passbook account, or buying the odd CD or U.S. Savings Bond, doth not an investment manager make. This is egregious grasping at rhetorical straws.

It is certainly true that most people who have the option of participating in a 401(k) or similar type of tax-advantaged retirement savings plan take that option. Why wouldn't they, when private annuity pension plans and long-term job security have gone the way of the LP and 8-track tape? Most "early retirement" in this country is not a result of comfortable, fun-loving seniors wanting to spend more time on Alaskan whale-watching cruises. Most of it occurs in two economic segments: low-paid workers who are literally worn out and broken from years of hazardous or strenuous labor, and high-paid workers who are "pushed out" by the corporate bean-counters so that they can be replaced by younger workers who can be paid less. The corporations, who wish you to invest in their stock, have never been particularly interested in making sure that you work as long as you are able and that you are provided for as long as you live.

Approximately 40% of American workers are currently offered a private pension benefit. The overwhelming majority of these plans are known as "defined contribution" plans, as opposed to a "defined benefit" plan. In the former, what you get in the end depends on what you contributed over time. In the latter, you get an annuity that is agreed-upon in advance of your retirement, and which is not necessarily exhausted if you are "lucky" enough to live longer than average.

401(k) plans, Keoughs, IRAs, and the Federal Thrift Savings Plan (TSP) accounts all work in a similar fashion: the worker's own contributions, and in some cases matching funds from the employer, are invested in individual accounts which grow tax-free until retirement. Like any other investment in stocks and bonds, they are subject to market risk, and they have investment costs that vary widely, depending on the fund chosen and the investment strategy adopted by the portfolio manager. Very few workers in employer-sponsored programs like 401(k) plans have any choice over which company manages the fund and how it manages the fund. If, for instance, you have moral problems with buying tobacco or weapons-manufacturing or polluter stock, or you object to owning a piece of oil companies in which overcompensated but politically-connected executives engage in insider trading and leave the little shareholders holding worthless paper, or you think that buying and holding appropriately-priced value stocks is a much better strategy than a constant in-and-out position in bubbly and overpriced tech stocks, you're out of luck if you are stuck in an employer-chosen plan which doesn't share your philosophy. Bush seems to want us to be kind of informed, but not too much and not really enough to be in control. You have to wonder why.

Social Security is a "defined benefit" plan. Although the benefit you receive is calculated in part on your average earnings in the past, there is a bedrock minimum level under which it does not go. Furthermore, you cannot outlive Social Security benefits, because Social Security continues to pay you if you live to 99 or beyond. Under a "defined contribution" plan, you have to hope that the amount you saved will be enough even if you live significantly longer than you are predicted to on average.

CONCLUSION: Bush's argument about the "average" American's experience with investing in the private market cuts both ways. If we do have that experience, it is because whatever personal resources over and above Social Security most of us will have in our retirement is already subject to market risk and potential fund-management inefficiency, wastefulness, stupidity or even fraud. We are also subject to the risk that we will outlive our savings. In the current system, we "hedge" the private investment risk by providing, in addition, a minimum guaranteed Social Security benefit that is not subject to market or longevity risks. Bush wants us to put all of our eggs in one basket. Since we're such experienced investors, we really need to tell him that that's a high-risk--and antisocial--strategy. --5/21/00

"Question #1: Aren't personal retirement accounts more risky than Social Security benefits? *

BUSH'S ANSWER: "Actually, personal retirement accounts are needed to make Social Security more secure. Past history shows that the government periodically resorts to cutting Social Security benefits or raising Social Security taxes while providing no greater benefit."

FACT: It is certainly true that Social Security taxes have been raised over the 65 years the program has been in existence. It was designed as a "pay-as-you-go" system in which current workers' payroll taxes pay for current retirees' benefits. The ratio of workers to retirees was 12:1 in the 1940s, 5:1 in 1960, and 3:1 today. Because of progress in healthcare, safety, and nutrition, Americans are living longer lives today than they were in 1940, and so drawing more retirement benefits. Wouldn't it be odd not to have to make funding adjustments to a system that had no original "surplus" to start with? Saying that "the government periodically resorts to" raising Social Security taxes makes it sound as if the program has been poorly managed. But if the program is supposed to be funded solely by payroll taxes, then don't payroll taxes have to keep up with the program? In what sense would this be a "last resort"?

BUSH'S ANSWER: "The Social Security Administration (SSA) itself says that, absent changes such as personal retirement accounts, benefit cuts and/or tax increases will occur again in the future. According to the SSA actuaries, benefits will eventually need to be cut by 30 percent under current law. Alternatively, future workers would eventually have to pay a 19 percent payroll tax (instead of the current 12 percent), but would receive no additional benefits. The existing benefit structure not only carries a high degree of risk for younger workers, it also carries the likelihood that currently-promised benefits will not be there."

MORE FACT: The SSA actuaries say no such thing, at least not in the March 2000 Trustee's Report. [http://www.ssa.gov/OACT/TR/TR00/trtoc.html] This is what the report actually says:

"The size of the actuarial balance for any valuation period represents a measure of the program's financial adequacy for that period. The actuarial balance can be interpreted as the amount of change which, if made to the payroll tax rates scheduled under present law for each year in the period, would bring the program into exact actuarial balance. For example, if the 75-year actuarial deficit of 1.89 percent under intermediate assumptions were to be addressed by raising scheduled tax rates by 0.95 percent for employees and employers, each, and by 1.90 percent for the self-employed, then OASDI assets at the beginning of 2000, together with income from payroll taxes, interest, and other sources, would be just sufficient to meet all expenditures for the long-range [75-year] period and leave a trust fund level at the end of the period equal to about 100 percent of the following year's expenditures. Of course, there are numerous other changes to tax rates, revenue provisions, or benefit provisions that could also result in the elimination of the long-range actuarial deficit."

The Bush campaign is using the projected revenue/expenditure imbalance from the year 2075 to arrive at this 30% benefit reduction or 19% payroll tax. In other words, this is what would eventually happen if we did nothing at all to Social Security for at least 50 years. What the actuaries are saying, however, is that if Social Security revenues were adjusted ONLY by increasing payroll taxes, and if that adjustment were made incrementally over the entire period 2000-2075, the actual total payroll tax increase would be 0.95% for wage-earners and 1.90% for the self-employed, to achieve all promised benefits for the next 75 years.

Furthermore, the actuaries do not say that moving to private accounts is the only reasonable alternative to this increase in payroll taxes. There are plenty of other alternatives, including among others the use of general revenue budget surpluses to augment the trust fund or raising the cap on FICA-taxable wages from the current $76,200, that could accomplish the same elimination of the long-term deficit as an increase in the FICA rate.

BUSH'S ANSWER: "By contrast, private sector investments consistently have yielded a higher return than Social Security now promises. Even if Social Security could deliver on all its currently-promised benefits, it only would provide a 2 percent real return to new workers. By contrast, government-guaranteed inflation-indexed bonds yield 4 percent after inflation and the average returns on stocks have been 7 percent after inflation."

MORE FACT: Social Security offers a "2 percent real return" only if you assume that you will make average wages for 40 years of working life and will collect average benefits for 15 to 20 years thereafter. But of course, Social Security also pays benefits to the disabled, as well as to non-wage-earning wives and widows. If you spend part of your "working years" at home raising children, or if you lose out in life's lottery--and who of us can guarantee that we won't be in an accident tomorrow that effectively ends our working life?--your "return" from Social Security is much greater than 2%. That's where the "social" and "security" part of "Social Security" comes in. Bush is comparing a highly successful form of social insurance to an "average" individual investment.

Furthermore, this "2 percent" return assumes that if there were no Social Security benefits being paid to current retirees, current workers wouldn't be supporting them privately either, which suggests in turn that they would starve. How about looking at it this way: If you have retired parents, and they aren't living in your spare bedroom and eating out of your refrigerator, you are, in effect, getting an "income subsidy" from Social Security long before you retire yourself. I don't know about everyone else, but if I were feeding, housing, and clothing my elderly parents right now without their Social Security benefits, it would cost me quite a bit more than 2% of my income. The Bush campaign pretends that the only benefit we get from Social Security is the check we draw on retirement, and the only way to measure its "return" is against what we paid in.

And, of course, once again the Bush campaign chooses to believe that the future will be just like the past when it comes to calculating stock market returns. But the SSA actuaries do not, in fact, use economic growth, productivity, and corporate profit estimates from the LAST 75 years to predict the NEXT 75 years when it comes to Social Security. The fact is that if the economy of the future is going to behave just like the economy of the past, there will be no Social Security shortfall. If the SSA's economic forecasts are more realistic, then there's no reason to believe that stocks in the future will average 7% returns. And of course, the Bush campaign doesn't point out that the main reason that bond yields are so much lower than stock yields is that bonds are much less risky. Social Security as it is currently structured is even less risky than bond investments.

Bush also ignores the fact that "average returns" express not just a "horizontal" average over time, but also a "vertical" average for any group of investors. We know that in some of the last 75 years the market has offered returns much higher than 7%, and in some years investments have done much worse. But it is also true for any given year that some investors do much better than the market average, and some lose their shirts. It is not logically or mathematically possible to assume that all investors will do the same or better than average, or that none will do worse than average. Markets create winners and losers.

BUSH'S ANSWER: "Furthermore, Governor Bush has promised that any personal account would be voluntary. Thus, individuals who prefer the current system can simply not change. For those who choose to invest, there would be safety and soundness standards."

MORE FACT: How can Governor Bush claim that personal accounts will "save" Social Security if he cannot even know how many of us will participate? What if most of us don't? What if most of the people who do just so happen to have the highest incomes? Is it possible that Governor Bush is here admitting that his plan isn't going to have a particularly significant impact on Social Security's future, since he's saying that it won't matter if we don't participate?

And what are these "safety and soundness standards" going to be? Out of one side of his mouth, Bush is saying that Americans should manage their own investments, not rely on the government to do it for them. Then he responds to the objection that this creates a great deal of risk by suggesting that the government will write rules that will regulate investment management, so that no one "speculates" too much or otherwise runs with the financial scissors. This is a strangely "Nanny State" philosophy for Bush to adopt at this stage of the game.

CONCLUSION: Bush overstates the risk of leaving Social Security alone and understates the risk of investing in private markets. He also ignores the fact that Social Security is a form of social insurance that does not make "losers" out of the low-earners, the disabled, the unsophisticated, the risk-adverse, and those who engage in unpaid but economically useful labor, also known as "mommies." He treats it only as an alternative personal investment mechanism, which allows him to compare it unfavorably with private investments. At the same time, he deals with the problem of risk-aversion by using inconsistent historical analysis to arrive at overstated returns, and by offering both regulated investment strategies and voluntary participation as a part of his "free market" program. 5/18/00

*From "Social Security Fact Sheet, Questions and Answers about Personal Retirement Accounts," www.georgewbush.com