- The Washington Times - Monday, April 29, 2002

President Bush's plan to save Social Security by shifting to a new system of private investment retirement accounts is likely to be the hot political issue in this fall's congressional elections.
Allowing workers to invest a small part of their Social Security payroll taxes in stock and bond funds that they would own, control and leave to their heirs was a major theme in Mr. Bush's presidential campaign.
A commission he appointed last year came up with three ways to implement his plan, and the administration wants to use this year's election to thoroughly debate the idea in preparation for legislative action in 2003.
Democratic leaders, however, say they hope to turn the issue into a powerful political weapon against Republican candidates to win back the House and strengthen their one-vote hold on the Senate. The Republican Party's campaign officials say they expect to be hit with a major Democratic offensive, replete with mass mailings, telemarketing calls and television and radio ads aimed at elderly voters who could well decide the election's outcome.
"The 2002 election may answer the question of whether Social Security is still the third rail of American politics," a Democratic National Committee official says, speaking on the condition of anonymity.
The Democrats' strategy was "road-tested" last month when House Minority Leader Richard A. Gephardt and numerous other party officials charged that Republicans have "a secret plan" to cut Social Security benefits after the 2002 elections.
"One has to look no further than the thousands of workers at Enron who lost their entire retirement savings. Privatization could leave families with nothing for retirement. Americans know that losses in the market this year have now added more years before they can retire," says Democratic National Committee Chairman Terry McAuliffe.
There seems to be some division in Republican ranks about how to handle the Social Security issue and whether to push it in this year's campaigns. When asked if the Republican Party would be running on the issue, Rep. Thomas M. Davis III of Virginia, the National Republican Congressional Committee chairman, said: "Not on your life. We're staying away from that."
But the president and other Republican congressional leaders show no sign of backing away from their proposal. In a speech last month at a National Summit on Retirement Savings, Mr. Bush aggressively defended his plan, pointing out that "Americans are saving too little, often dangerously too little."
A survey by the Employee Benefit Research Institute found earlier this year that 47 percent of all workers had saved less than $50,000 for their retirement. Notably, only 40 percent of retirees age 60 and older had saved less than $50,000.
Contrary to Democratic charges, Mr. Bush's plan would not reduce any benefits for those on or nearing Social Security. The plan is largely geared to younger workers and those who will enter the work force in the future. The new system would be voluntary.
"Some people like their Social Security exactly the way it is. But for younger workers who want to take advantage of the power of compound interest, we should allow for personal retirement accounts," Mr. Bush said.

The politics of Enron
At the heart of the Democrats' strategy is their belief that the collapse of the energy giant Enron and the thousands of employees who lost some or all of their retirement savings has frightened millions of workers away from the stock market.
But the evidence accumulated thus far shows this has not happened. Three months after the Enron scandal broke in October, a survey of 1,011 adults conducted by the University of Connecticut's Roper Center found that 63 percent supported a plan "to put a portion of their Social Security payroll taxes into personal retirement accounts that would be invested in private stocks and bonds."
Last month, a National Public Radio survey asked 1,500 registered voters, "Would you support or oppose a plan in which people who choose to could invest some of their Social Security contributions in the stock market?" The respondents supported such a plan 55 percent to 39 percent.
The bipartisan survey was conducted for NPR by Greenberg, Quinlan, Rosner Research, a Democratic firm, and Public Opinion Strategies, a Republican polling firm. Notably, the question directly addressed the Enron scandal and reminded respondents about the huge stock losses suffered by "thousands of Enron employees whose pension funds had been invested in the company's stock."
"Knowing this, do you agree more with the Democrats in Congress who say this is not the time to turn Social Security over to the stock market. Or with Republicans in Congress who say what happened at Enron proves people need more choice and to be in control of their own retirement options, including the right to invest a portion of their Social Security taxes in government-approved and diversified mutual funds?"
When a similar question was expressed in far more partisan terms, emphasizing "corporate influence in Washington," voters still sided with the Republicans by 52 percent to 41 percent.
Even in the immediate aftermath of the Enron debacle, a USA Today/CNN/Gallup Poll showed that the majority of voters' confidence in Wall Street, which was then nearing the end of a two-year slump, had not been shaken. Respondents favored private investment accounts by a margin of 64 percent to 31 percent.
Support for the idea is at 61 percent among Americans age 55 or less and jumps to 70 percent among those 44 or younger. But it falls to 30 percent among those 65 or older, and it this voter group that the Democrats intend to target this fall.
Moreover, there has been no significant divestiture among mutual funds and 401(k) investors since the Enron scandal broke, according to the Investment Company Institute, which surveys trends in stock and bond mutual fund investments for the government each month.
"Even though money flows coming into the mutual funds slowed noticeably during this entire period covering the September 11 attacks and the Enron period, there has been no indication that the mutual fund investors have lost faith in the equity market," says John Collins, the ICI's chief spokesman.
"When we finished our surveys at the end of last year, stock mutual funds all had net inflows" of continued cash contributions, Mr. Collins says. Notably, the amount of net assets in stock funds since December has remained nearly the same, between $3.4 trillion and $3.3 trillion. "They have ended roughly where they were," he says, while cash flows into other bond and balanced stock-bond funds rose during this period.
More than 93 million Americans, one in three adults of all ages, own shares in mutual funds "and that figure has been growing steadily year by year," he says. "When we survey investors, they tell us we are investing for our retirement, so it is a long-term perspective."

Reform in other countries
While the Democrats are portraying Mr. Bush's partial privatization plan as a risky scheme that would destroy Social Security, supporters point out that many other countries have begun to move toward forms of private pension reform to save their systems, including Great Britain, Australia, Sweden, Switzerland, Poland, Hungary and Chile.
In Great Britain, "an increasing transfer into personal pensions is now under way," a recent study by the Heritage Foundation found. Britain has a three-tiered pension system, two of which are government-run and financed. The third program revolves around tax-free personal pension plans that appear to be growing in popularity.
Sweden was the first country to enact a universal government-financed retirement system. But it, too, "is in the process of privatizing part of its pension program," the Heritage study found. Now workers can invest 2.5 percentage points of the 16 percent of income that they must contribute to the government to finance their pensions. These individual Pension Premium Accounts are invested in some 500 funds, largely in life insurance stocks.
Switzerland has a three-tiered system of pension plans, one of which guarantees a minimum return of 4 percent, investing the funds in bonds and other fixed-interest accounts. Another plan is a private pension format linked to life insurance and savings accounts. There is now a move to shift the plan away from bonds and into equity investments.
Social Security is solvent for the moment. Payroll taxes remain the only part of the government's total revenue flow that is yielding a surplus, bringing in more money than is needed to meet monthly retirement benefits. These surpluses are expected to rise as the economy grows over the ensuing decade, although the program will begin falling short of cash after 2010, when millions of baby boomers start to retire.

Running out of time
Social Security trustees said last month that the system is expected to become insolvent by 2041 three years later than earlier estimates unless benefits are cut, taxes are raised or additional funds are borrowed.
"This reprieve provides little comfort, as the program continues to face substantial financial challenges in the not-too-distant future that need to be addressed at the earliest opportunity," says Treasury Secretary Paul H. O'Neill, one of the program's trustees.
Democratic leaders have not said how they would reform the system beyond raising taxes. Rep. Peter A. DeFazio, Oregon Democrat, has offered a plan to lift the income cap on payroll taxes, which would pull in an additional $1.2 trillion, according to one estimate. But that would not be anywhere near enough to make up the unfunded taxpayer liability that is forecast to cost more than $20 trillion.
The Bush plan envisions another option to safeguard the program for the future: investment and the power of compound interest. It would begin to let workers put a portion of their payroll taxes into stock and bond funds that, over their working lives, would provide them with a greater return on their money than the 1 percent to 3 percent yield that Social Security currently offers.
Over time, workers would be able to retire on a much larger private fund of their own and thus would be gradually weaned from the current system, shrinking its future taxpayer liabilities.
"Payroll taxes are already so high relative to benefits that most young workers will receive an extremely poor rate of return, a return far below that provided by private capital markets," says Michael Tanner, director of the Cato Institute's Project on Social Security Privatization.
"One of the strongest arguments for privatization is that a system of individual accounts would give low-income Americans an opportunity to accumulate wealth," Mr. Tanner says.

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