- The Washington Times - Thursday, January 27, 2005

The stock market’s poor performance in the past five years has precipitated a substantial drop in support for partial privatization of Social Security among the “investor class,” the half of Americans who own stocks, surveys show.

This key group backed privatization in 2000 and was expected to provide critical support for President Bush’s reform program this year. But the market’s faltering rebound from an historic three-year downturn has left major indexes below levels attained in spring 2000 and changed the political landscape.

A survey of investors this month by the Gallup Organization and UBS investment house found that support for allowing taxpayers to put part of their Social Security contributions into private accounts had fallen to 49 percent from 60 percent five years ago.

Moreover, 46 percent of the same households with savings and investments of $10,000 or more now prefer to retain the current federal program, which was designed to provide a minimal but secure retirement income for seniors. About one-third of investors wanted to keep the current system in 2000.

The investor survey mirrors broader polls showing the public is sharply divided over whether to invest Social Security funds in the volatile stock market, with a slim majority against the idea.

“Public support gained, or lost, in this fight will determine whether Bush’s plan becomes law,” said Stuart Sweet, president of Capitol Analysts Network Inc.

He expects a monumental political battle between supporters of the Bush plan, including many Wall Street and Fortune 500 firms, and powerful liberal detractors, like AARP, which regard Social Security as the nation’s most inviolable and effective social program.

“As of today, Bush has a 40 percent chance of winning” support for a privatization plan, which would require Democratic votes to pass in the Senate, Mr. Sweet said.

Mr. Bush’s strongest suit, as seen in opinion polls, is public skepticism about the stability of Social Security’s finances and fear that future benefits may not be paid, fostered in part by the president’s warnings that the system faces a funding crisis.

“Young voters feel this most acutely,” Mr. Sweet said, noting the famous poll in 1994 that found more young voters believed in UFOs than thought they would receive Social Security benefits.

Skepticism about Social Security has declined in more recent polls, however, as disillusionment with the stock market has grown. The public is more optimistic today about the future of Social Security than it was during the 1990s, said Greg Shaw, a political science professor at Illinois Wesleyan University.

The UBS-Gallup poll found that more investors today believe Social Security can remain viable without major change, and 83 percent said they expect to need Social Security as a source of income in retirement, up from 70 percent in 2000.

Seniors without investments or pensions today rely on Social Security for all of their retirement income. More than half of retirees rely on Social Security for more than half their income. The program is credited with having mostly eliminated poverty in old age.

Critics of the Bush plan point to fading public support spawned by the stock market’s failure to overcome losses in the past five years. They contend that poor and uneducated investors, even more than existing investors who are mostly upper-income, would risk losing much of the money in private accounts and face poverty in retirement.

To win passage of private accounts in Congress, Mr. Sweet said Mr. Bush most likely will have to agree to let workers put their payroll taxes only into broadly diversified stock and bond index funds, which minimize risk and carry minimal management fees.

Such accounts would attempt to capitalize on the stock market’s historic 7 percent average return in the past century.

But by allowing little discretion and only the most conservative investment strategies, such a compromise would exclude many of the riskier but potentially more lucrative choices investors are flocking to today to escape middling returns in the stock market.

The hot investments today include real estate deals with returns averaging from 20 percent to 30 percent last year, and stocks in fast-growing emerging economies like Eastern Europe and Latin America, where yields soared by as much as 80 percent last year.

In addition, while the stock market on average has outperformed the Treasury bond market and thus provided greater returns than Social Security benefits, which are linked to Treasury returns, that has not always been true during any 10-year period that could make or break an investor’s retirement prospects, said Richard Berner, chief U.S. economist with Morgan Stanley.

Returns on stocks often have fallen short of the returns on bonds over a five- or 10-year period, with the past five years being a prime example of that.

On the positive side, the infusion of an estimated $5 trillion in Social Security funds into the stock market by 2040 would boost flagging returns at least for a while, Mr. Berner said.

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