Social Security 'Privatizers' Unbowed
By George Hager
The market's recent imitation of a deranged elevator -- rising reassuringly one day only to plunge sickeningly the next -- comes as no shock to economists, policymakers and citizens who have faith that the long-term trend is up.
But if these recent fluctuations worsen into a longer-term funk that lasts until Congress takes up Social Security reform, perhaps as early as next spring, proponents and critics said it could be difficult to pass legislation to shift part of the trust funds into private accounts.
Rep. Mark Sanford (R-S.C.), among Congress's leading privatization proponents, said he worries that a continued market slide could hurt his side. "The politics will be tough, real tough if the market sinks," he said. The idea's prospects could depend on "where the stock market [is] going to be next spring," said Rep. Jim McDermott (D-Wash.), an opponent of private accounts. "If [the Dow Jones industrial average is] at 6,000, nothing's going to happen. If it's at 12,000, well . . . "
After hitting a peak of 9,337.97 points on July 17, the Dow began to fall, bottoming out at 7,539.07 on Aug. 31, a drop of more than 19 percent. It closed yesterday at 7795.50, still more than 16 percent off its peak.
This does not shake the faith of privatizers who take the long view.
"I don't think any economists will have changed their minds based on what's happened over the last few weeks," said Kevin Hassett, a resident scholar at the American Enterprise Institute.
Like other privatizers, Hassett backs the idea of diverting Social Security funds from government-controlled investments in safe but low-yield Treasury securities to individual accounts that could be invested in riskier but potentially more rewarding stocks.
Even some economists who believe that it would be ill-advised to let individuals entrust their retirement safety net to the market don't think Wall Street's swoon will kill the move toward privatization.
The market is "very much like bungee jumping -- it's exhilarating, it's scary, it's safe. In a short time, we're back up on the bridge," said Robert Reischauer, a senior fellow at the Brookings Institution and a strong opponent of private Social Security accounts.
Reischauer and other critics instead back the idea of letting the government invest some of the Social Security trust funds in the stock market, sparing individuals most of the risk and management fees that would come with individual accounts.
Either move would represent a major change in Social Security, one of the most popular and politically sensitive programs the federal government runs. With baby boomers set to create huge demands on it when they begin retiring early in the next century, Social Security is projected to fall into severe financial difficulty between 2015 and 2030, creating pressure on today's policymakers to make significant changes.
What makes either stock market alternative so appealing is that the other major options -- raising taxes or cutting benefits -- are regarded as politically dangerous.
The White House is expected to convene a summit following the fall elections to thrash out various aspects of Social Security reform, and then propose legislation next year. All sides see next spring as a window of opportunity for Congress and the president to agree to any changes before the presidential and congressional elections in 2000 make compromise unlikely.
Proponents argue that even with its periodic downturns, the stock market has generated a 7 percent return on investments over time, much better than the 3 percent or less returns, depending on the retiree, that will be provided by the current Social Security system.
Critics concede the allure of those higher rates, but they argue that any individual's return could be higher or lower, depending on when that person retires.
Gary Burtless, a senior fellow at the Brookings Institution, said his calculations show that long-term, inflation-adjusted stock market returns have varied wildly in this century, from less than 2 percent to about 10 percent for someone who invested over a 40-year period. Workers with identical wages and identical investment patterns who retired at different times could wind up with sharply different benefits, Burtless said.
Polls have found Americans receptive to the idea of private Social Security accounts, but some caution that the backing is tenuous. "There's not nearly as much support for it as is widely assumed," said Guy Molyneux, vice president with the polling firm Peter Hart Research Associates.
A poll the firm conducted in July for the National Committee to Preserve Social Security and Medicare found 62 percent support for the idea. But Molyneux said the results reminded him of the initial public reaction to the Clinton administration's 1993 plan to overhaul the health care system. At first, public response was quite positive. But as opponents began to pick apart the details and run negative TV ads the plan faltered and finally died.
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