U.S. Democrats demand conditions on Social Security (SS success is 70 years old

WASHINGTON (Reuters) - On the eve of Social Security's 70th anniversary, Democrats said on Saturday they are ready to move toward revamping the financially troubled retirement program but warned against stripping away benefits to retirees and relying on private accounts for funding.

"We have a moral obligation to stand up and protect Social Security for the next 70 years and beyond -- that means stopping privatization and dropping partisan demands for private accounts," said Rep. John Salazar, a Colorado Democrat, in his response to President George W. Bush's radio address.

Social Security, established by President Franklin Roosevelt and one of the key government programs established during the Great Depression, was designed to help ensure that senior citizens could live out their remaining years in financial comfort. It is funded by a tax taken from the wages of U.S. workers and in turn is distributed to retirees.

But many lawmakers, economists and Bush administration officials say the system faces a severe funding crunch over the next 25 years as the baby boom generation retires. That will leave fewer workers putting money into the program to support each retiree.

There is an effort by Republicans to move toward private investment accounts, thereby reducing the government's role in retiree funding. But they have been forced to delay action on legislation to revamp Social Security because of strong opposition from Democrats.

"Social Security has never failed to pay promised benefits, and Democrats will fight to make sure that Republicans do not turn a guaranteed benefit into a guaranteed gamble," said House Democratic leader Nancy Pelosi of California.

"Democrats stand ready to address the challenges facing Social Security's solvency, but this cannot begin until Republicans begin talking about ways to make Social Security stronger, not weaker," she said.

ON SOCIAL SECURITY'S 70TH BIRTHDAY DEMS BELIEVE OBSTRUCTING PRESIDENT'S EFFORTS IS EQUAL TO A WIN

"It's incredibly ironic that the same Democrats who are praising the virtue of Social Security on its 70th birthday are the same ones who refuse to fix the problems that threaten its future. After acknowledging the challenges facing the system, Democrats are content playing politics with the future of Social Security rather than engage in a meaningful debate. President Bush believes that the promise of Social Security fulfilled over the last 70 years ought to be a promise we keep for future generations. Scoring political points by shirking responsibility for tomorrow's seniors is not a birthday party Americans can afford to attend."

-Tracey Schmitt, RNC Press Secretary

On Sunday August 14, Social Security Turns 70. (Glenn Hubbard, "Happy 70th, Social Security," Business Week, 8/8/05)

· "Social Security Remains An Important Subject In 2005. But Key Aspects Of The Economic Environment Have Changed Radically Since 1935 Or Even 1965." (Glenn Hubbard, "Happy 70th, Social Security," Business Week, 8/8/05)

DEMOCRATS CHANGE THEIR FORECAST ON SOCIAL SECURITY

Five Years Ago New Democrats Signed Hyde Park Agreement:

"At The Invitation Of The Democratic Leadership Council, Elected Officials From Across The Country Met At Franklin D. Roosevelt's Estate In Hyde Park, N.Y." (Democratic Leadership Council, "The Hyde Park Declaration: A Statement Of Principles And A Policy Agenda For The 21st Century," http://www.ndol.org/print.cfm?contentid=1926, 8/1/00)

· "Their Goal Was To Begin Drafting A Statement Of New Democrat Principles And A Broad National Policy Agenda For The Next Decade. This Manifesto, The Hyde Park Declaration, Is The Result Of Their Work." (Democratic Leadership Council, "The Hyde Park Declaration: A Statement Of Principles And A Policy Agenda For The 21st Century," http://www.ndol.org/print.cfm?contentid=1926, 8/1/00)

Hyde Park Declaration Called For Innovative Social Security Reforms Including: "Honor Our Commitment To Seniors By Ensuring The Future Solvency Of Social Security And Medicare ... Make Structural Reforms In Social Security And Medicare That Slow Their Future Cost Growth, Modernize Benefits ... And Give Beneficiaries More Choice And Control Over Their Retirement And Health Security." (Democratic Leadership Council, "The Hyde Park Declaration: A Statement Of Principles And A Policy Agenda For The 21st Century," http://www.ndol.org/print.cfm?contentid=1926, 8/1/00)

The Declaration Was Signed By 73 Elected Democrats, Including, 5 Current U.S. Senators; Evan Bayh (IN) John Kerry (MA), Mary Landrieu (LA), Joseph Lieberman (CT), And Blanche Lincoln (AR); 4 Current U.S. Representatives: Jim Davis (FL), James Moran, Jr. (VA), Allyson Schwartz (PA), Ellen Tauscher (CA); And 3 Current Governors; Janet Napolitano (AZ), Kathleen Sebelius (KS), And Tom Vilsack (IA). (Democratic Leadership Council, "The Hyde Park Declaration: A Statement Of Principles And A Policy Agenda For The 21st Century," http://www.ndol.org/print.cfm?contentid=1926, 8/1/00)

Today They Attack President's Efforts To Strengthen Social Security:

Gov. Tom Vilsack (D-IA), Chairman Of Democratic Leadership Council: "[I]t's Not Enough To Simply Talk About Social Security Because, Frankly, There Are Many More Problems With Healthcare Security At This Point In Time." (Tim Grieve, "Life Of The Party," Salon.com, 5/18/05)

Sen. John Kerry (D-MA) Called For The President To Stop "Pushing The Privatization And Admit It's Not Going To Pass And It's A Failure ..." (CNN's "Inside Politics," 3/15/05)

Sen. Mary Landrieu (D-LA): "[The President's Plan] Will Only Lead To Reduced Benefits For Everyone, Increased Risk, And Would Serve To Undermine The Current System." (Bill Walsh, "Bush Touts Investment Accounts In Shreveport," [New Orleans, LA] Times-Picayune, 3/12/05)

Sen. Joe Lieberman (D-CT): "President Bush's Plan To Privatize The Program Would Do Nothing To Save Social Security -- In Fact, It Would Hasten Its Day Of Reckoning ..." (Peter Urban, "Democrats Hold Social Security Unity Rally," Connecticut Post, 4/27/05)

"[Sen. Blanche Lincoln (D-AR)] Said She Hoped Senate Democrats Would Act In Unison To Prevent The Diversion Of Social Security Taxes To Private Investment Accounts. 'It's Critical For What We Stand For,' Lincoln Said." (Warren Vieth and Richard Simon, "Democrats Vow To Block Bush On Social Security," Los Angeles Times, 2/2/05)

· Lincoln: "I Do Not Support Individual Investment Accounts ..." ("On The Issues: Social Security Proposals Divide Federal Candidates," Arkansas Democrat-Gazette, 9/20/04)

Rep. James Moran (D-VA): "The President Continues To Travel Around The Country Pushing His Scheme To Privatize Social Security ... Virginians Are Not So Easily Convinced By This Road Show, Though." (Jeffrey Kelley, "Bush's Visit Draws Praise And Protest," Richmond Times-Dispatch, 4/30/05)

Rep. Allyson Schwartz (D-PA) Said The President's Social Security Plan Would "'Really Dismantle Social Security As You Know It' For Children And Grandchildren, And Would Lead To Great Inequities Among The Generations." (Robin Toner, "Appeal To Young On Pension Plan Draws The Attention Of Their Elders," The New York Times, 2/23/05)

Rep. Ellen O. Tauscher (D-CA): "We Don't Have To Come Up With A Plan Until We Defeat Theirs ... [The President] Doesn't Have A Plan, Either." (Marie Cocco, "Half Credit," The American Prospect, 5/05)

In The Past, Democrats Understood The Need To Strengthen Social Security:

Sen. Harry Reid (D-NV): "[M]ost Of Us Have No Problem With Taking A Small Amount Of The Social Security Proceeds And Putting It Into The Private Sector." (Fox's "Fox News Sunday," 2/14/99)

Fox's Tony Snow: "Are You Opposed To Letting People Make The Investment Decisions? In Other Words, Having Some Component Where They Say, 'I'll Save The Money Rather Than Letting Uncle Sam Do It For Me'"REID: "I Think It's Important That We Look And I'm Totally In Favor Of Doing This And In Fact, There Are A Couple Of Programs Now That We're Taking A Look At To See If It Will Work With Social Security." (Fox's " News Sunday," 2/14/99)

Sen. Dick Durbin (D-IL) Press Release: "Durbin Said Due To The Increasing Number Of 'Baby Boomers' Reaching Retirement Age, Social Security Will Be Unable To Pay Out Full Benefits ... But The Sooner Congress Acts To Avert This Crisis The Easier And Less Painful It Will Be." (Sen. Dick Durbin, "Reforming Social Security," Press Release, 9/15/98)

Sen. Max Baucus (D-MT): "Frankly, I Think The Problems We're Facing With Social Security Are Going To Be Upon Us A Little More Quickly Than I Think Some People Realize." (Sen. Max Baucus, Finance Committee, U.S. Senate, Hearing, 4/9/03)

Sen. Chuck Schumer (D-NY): "We Have To Move On Now, And Start Fixing Social Security And Preserving It And Reining In The HMOs And Making Our Schools Better." (Fox's "Special Report," 2/12/99)

Sen. Carl Levin (D-MI): President Clinton's "Budget Focuses On The Right Priorities For The Nation -- Education, Health Care, Child Care And The Strengthening And Protecting Of Social Security." (Melanie Eversley, "Budget Proposal Has Some Good News For Michigan," Detroit Free Press, 2/2/99)

Sen. Byron Dorgan (D-ND): "Fixing Social Security Is An Urgent Priority. It Ought To Be At The Top Of Both Parties' Agendas." (Sen. Byron Dorgan, "Fixing Social Security Must Top Both Parties' Agendas," Roll Call, 12/6/99)

Sen. Ted Kennedy (D-MA): "The President Has It Right And It's A Position That I Think Virtually All The Democrats Support In The Senate. Protect Social Security ..." (ABC's "This Week," 7/11/99)

Sen. Blanche Lincoln (D-AR) Called Universal Savings Accounts "An Attractive Incentive." (Larry Ault, "Lincoln Pledges Efforts," Arkansas Democrat-Gazette, 3/31/99)

Sen. Kent Conrad (D-ND): "I Was At The Social Security Summit At The White House, Along With 40 Of My Colleagues, Republicans And Democrats. And There Was Virtual Unanimity Of Opinion That We Simply Have To Get A Higher Return From The Social Security Investments." (Fox News' "Special Report," 1/20/99)

Rep. Sander Levin (D-MI): "People Can See, I Think, A [Social Security] Crisis Where There Immediate Family Is Affected Even If Not Immediately ... This Is Something That Affects Almost Everybody's Immediate Family." (Richard A. Ryan, "Social Security Reform Stalls," The Detroit News, 2/2/02)

Rep. Charles Rangel (D-NY): "I Am One Democrat That Truly Believes That Democrats Will Not Benefit By Doing Nothing On Social Security." (Rep. Charles Rangel, Press Conference, 1/21/99)

Rep. Bob Menendez (D-NJ): "By Using Our Surplus Responsibly, By Investing Today, We Can Be Sure Social Security ... Will Be There Tomorrow." (Paul Kane, "New Jersey Impact In Budget," States News Service, 2/1/99)

President Clinton: "[F]irst, And Above All, We Must Save Social Security For The 21st Century." (President Bill Clinton, State Of The Union, 1/19/99)

· President Clinton: "This Fiscal Crisis In Social Security Affects Every Generation." (President Bill Clinton, Remarks At Georgetown University On Social Security, Washington, DC, 2/9/98)

But Now Dems Believe Solution Is To Obstruct:

House Minority Leader Nancy Pelosi (D-CA): "For 70 Years, Social Security Has Never Failed To Pay Promised Benefits, And Democrats Will Fight To Make Sure That Republicans Do Not Turn A Guaranteed Benefit Into A Guaranteed Gamble." (Rep. Nancy Pelosi, "House Democrats Hold 1,000th Social Security Event," Press Release, 8/2/05)

· House Minority Leader Nancy Pelosi (D-CA): "Our Plan Is To Stop Him From -- Stop Him. He Must Be Stopped." (Fox News' "Special Report," 3/17/05)

Senate Minority Leader Harry Reid (D-NV): "And I'm Here Today To Say That Fight Has Not Ended. It Is Only Beginning." (Sen. Harry Reid, Remarks At National Press Club, Washington, DC, 5/26/05)

Sen. Max Baucus (D-MT) At Social Security Rally: "We're Going To Win!" (Sen. Max Baucus, Social Security Rally With Democratic Members Of The House And Senate, Washington, DC, 4/26/05)

Sen. Chris Dodd (D-CT): "But The President's Plan I Think Is Dead On Arrival." (Fox News' "Fox News Sunday," 7/31/05)

Brad Woodhouse, Americans United To Protect Social Security Spokesman: "It Is Fairly Clear To Us That Although We're Not Prepared To Declare Victory Today, There Will Be A Moment In The Not-So-Distant Future That The President's Effort Will Come To An End." (Stephen Majors, "Group Targets Reps On Reform," The Bradenton [FL] Herald, 7/28/05)

Social Security Problems STILL Exist:

Social Security Is Sound For Today's Seniors And For Those Nearing Retirement, But It Needs To Be Fixed For Younger Workers -- Our Children And Grandchildren. The Government Has Made Promises It Cannot Afford To Pay For With The Current Pay-As-You-Go System.

· In 1950, There Were 16 Workers To Support Every One Beneficiary Of Social Security. ("Strengthening Social Security For The 21st Century," The White House, 2/05, p. 2)

· Today, There Are Only 3.3 Workers Supporting Every Social Security Beneficiary. ("Strengthening Social Security For The 21st Century," The White House, 2/05, p. 2)

· By The Time Today's Youngest Workers Retire, There Will Only Be 2 Workers Supporting Each Beneficiary. ("Strengthening Social Security For The 21st Century," The White House, 2/05, p. 2)

If We Do Not Act To Fix Social Security Now, The Only Solutions Will Be Dramatically Higher Taxes, Massive New Borrowing Or Sudden And Severe Cuts In Social Security Benefits Or Other Government Programs.

· In 2008 -- Just Three Short Years From Now -- Baby Boomers Will Begin To Retire. And Over The Next Few Decades, People Will Be Living Longer And Benefits Are Scheduled To Increase Dramatically. (The White House Website, http://www.whitehouse.gov/infocus/social-security/ , Accessed 05/09/05)

· Just 12 Years From Now, In 2017, The Government Will Begin To Pay Out More In Social Security Benefits Than It Collects In Payroll Taxes -- And Shortfalls Then Will Grow Larger With Each Passing Year. ("The 2005 Annual Report Of The Board Of Trustees Of The Federal Old-Age And Survivors Insurance And Disability Insurance Trust Funds," Social Security Administration, 3/23/05)

· In 2041, When Today's Young Workers Begin To Retire, The Social Security System Will Be Bankrupt. ("The 2005 Annual Report Of The Board Of Trustees Of The Federal Old-Age And Survivors Insurance And Disability Insurance Trust Funds," Social Security Administration, 3/23/05)

Each Year We Wait Costs An Additional $600 Billion. (President George W. Bush, Remarks At Boisfeuillet Jones Atlanta Civic Center, Atlanta, GA, 7/22/05)

If Nothing Is Done "[B]enefits Would Be Reduced 26 Percent At The Point Of Trust Fund Exhaustion In 2041, With Reductions Reaching 32 Percent In 2079." ( "The 2005 Annual Report Of The Board Of Trustees Of The Federal Old-Age And Survivors Insurance And Disability Insurance Trust Funds," Social Security Administration, 3/23/05)

Or "[T]he Payroll Tax Would Be Increased To 16.66 Percent At The Point Of Trust Fund Exhaustion In 2041 And Continue Rising To 18.10 Percent In 2079." ( "The 2005 Annual Report Of The Board Of Trustees Of The Federal Old-Age And Survivors Insurance And Disability Insurance Trust Funds," Social Security Administration, 3/23/05)

President Bush And Republicans In Congress Continue To Work to Strengthen Social Security:

President Bush: "Now's The Time To Act On This. I Understand That Some In Washington Don't Want To Deal With The Issue. It's Too Politically Sensitive ... One Thing That's Not Going To Happen Is Me Dropping The Subject." (President George W. Bush, Remarks At Boisfeuillet Jones Atlanta Civic Center, Atlanta, GA, 7/22/05)

"[S]en. Charles E. Grassley (R-IA), Head Of The Senate Finance Committee, And Rep. Bill Thomas (R-CA), Chairman Of The House Ways And Means Committee, Have Said They Would Resume Their Efforts After The Congressional Summer Recess." (Edwin Chen, "Bush Revives Push To Restructure Social Security," Los Angeles Times, 7/23/05)

Sen. Rick Santorum (R-PA): "The President Hasn't Given Up, And Neither Will We." (Mark Preston, "GOP To Return To Social Security," Roll Call, 7/13/05)

Sen. Charles Grassley (R-IA): "I Won't Give Up Trying To Bridge The Divide." (Sen. Charles Grassley, "Sen. Grassley Will Continue Work To Build Social Security Consensus," Press Release, 7/14/05)

A Product Of The RNC Research Department

http://www.nationalreview.com/nrof_luskin/luskin200412271005.asp

December 27, 2004, 10:05 a.m.
The Lesson of Thrift
Personal accounts already work (which might be why the critics are so scared).

Critics of the Bush administration plan to reform Social Security with personal accounts have a seemingly endless supply of reasons why it can’t possibly work. You know the litany: It’s too risky. It’s too expensive. It’s too complicated.

The critics never mention that there’s already a government-administered retirement system that has shown for over 15 years that personal accounts are prudent, inexpensive, and simple. It’s the Thrift Savings Plan of the United States federal government, currently serving 3.3 million government employees.

The years since Thrift was first offered in 1987 couldn’t make for a better laboratory to crash-test a personal-account system. During this period there have been both bull and bear markets that were among the most severe in history. Through year-end 2003, investments in Thrift personal accounts have earned $44.4 billion in profits for system participants — an average of more than $13,000 per participant.

Over time and on average, 65 percent of the value of Thrift participant accounts has been invested in a special money-market account operated by the U.S. Treasury. That’s been responsible for about $20.3 billion of the total investment gains. But almost as much — $19.8 billion — came from an S&P 500 Index fund. That’s remarkable because, on average, only 30 percent of the value of participant accounts has been invested in the S&P 500 fund.

This is a textbook lesson in why it makes sense to invest in equities. Even though they are riskier in the short-term, they have a higher expected return in the long-term. That’s why the S&P 500 fund has earned just about as much for Thrift participants as the plan’s money-market account, with only half the money invested.

Yes, after the bubble burst there were three difficult years for stocks — 2000, 2001, and 2002. In those bear-market years, Thrift participants overall lost money in their accounts, with losses in the S&P 500 fund overcoming gains in the money-market account (as well as the third fund tracking the Lehman). But the non-stock funds did well in those years, and 2003 was a great comeback year for stocks. (This year has been okay, too). So the least-lucky participants, those who started right at the top of the market in 2000, have already gotten back to even — on average — and those who started even a little earlier or a little later are solidly ahead.

How did Thrift participants react to the bear market? Not a bit like the scared rabbits that critics pretend the non-professional investors are. They didn’t dump right at the bottom; there were net redemptions from the S&P 500 fund in only 1 year — 2001. And when the market finally hit true bottom in the early spring of 2003, there were the biggest net contributions to the S&P 500 fund in Thrift’s history. Today, 43 percent of participant investments are in the S&P 500 fund (with another 10 percent in the other two stock funds).

And what about Enron? Don’t the critics always carp that gullible investors will lose their retirement fortunes in stocks, like Enron, that suddenly implode? Amazingly enough, any Thrift participant who invested in the S&P 500 Index fund did indeed invest in Enron, because Enron was a member of the S&P 500 Index until it was removed in late November, 2001 (after all the damage had been done). But Enron was only 1 of 500 stocks, so its risk was diversified away, just like the textbooks say.

The use of index funds has other advantages too — advantages that perfectly answer the critics of personal accounts. For one thing, index funds are simple to understand. Thrift started with one for stocks and one for bonds — about as simple as you can get. Two years ago Thrift added two more funds — one for smaller company stocks and another for non-U.S. stocks. Still, it’s so simple that even the most inexperienced investor can get it.

And index funds are cheap to operate. As I discussed in detail in my column last week, investment management fees for index funds are ruinously small for the managers. And speaking of cheap, Thrift is a model of efficiency. Its administrative costs are only about six one-hundredths of 1 percent of invested assets. That compares especially favorably to Social Security, which has administrative costs that are more than five-times greater, even though you’d think its vast scale would lead to significant economies.

Index funds also have the advantage of being very resistant to meddling by government bureaucrats. Critics of personal accounts complain that any government-sponsored retirement system creates an irresistible temptation for politicians to guide participant dollars toward favored investments, or for politicians to grandstand by interfering with corporate governance. Indeed, all those things have happened in large pension plans sponsored by state governments. But there’s never been a whiff of it at Thrift. That’s because investment in simple index funds is clearly mandated in the legislation that created it — it would take an act of congress to permit a bureaucrat to funnel Thrift money into some pet investment.

Ironically, the Thrift Savings Plan — a perfect model of the future of Social Security reform with personal accounts — was created as part of the last round of Social Security reform. Legislation passed in 1983 as part of the reforms recommended by the Greenspan Commission mandated for the first time that federal employees participate in the Social Security system. The idea was to force millions of new young participants to move back the day when the demographic time bomb threatening Social Security will inevitably explode. As you can imagine, federal employees weren’t thrilled, and Thrift was part of a complex package of adjustments designed to make them feel better about it.

The Thrift Savings Plan proves that there’s nothing too risky, too expensive, or too complicated about personal accounts for Social Security. So what are the critics really worried about? I think they’re afraid that personal accounts are too empowering. Once a nation of voters becomes a nation of empowered investors — there’s just no telling what kind of empowerment they’ll want next.

— Donald Luskin is chief investment officer of Trend Macrolytics LLC, an independent economics and investment-research firm. He welcomes your comments at don@trendmacro.com.

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