Keep Wall Street Away From Social Security

By George N. Spitz
Newsday
Wednesday January 19, 2005

President George W. Bush is trying to create a sense of crisis by contending that the Social Security trust fund will run out of money in 2042. This should come as no surprise because 10 years ago President Bill Clinton warned that the Social Security surplus would disappear in 2029.
  President Bush proposes to solve the problem by permitting younger workers to privately invest a portion of their Social Security taxes in diversified funds approved by the government.
  President Clinton indicated a preference for allowing the Social Security fund trustees to directly purchase stocks, similar to how city and state comptrollers manage pension funds. One Democratic proposal called for the trustees to invest 40 percent of the surplus in the stock market.
  Any privatization plan would provide a bonanza for Wall Street, enriching brokers, consultants and money managers, not to mention lawyers when stocks go belly up as Enron and WorldCom did.
  Elected officials also benefit. As we have seen in New York, city and state comptrollers have received substantial contributions from beneficiaries of their investment policies.
  Before President Franklin Roosevelt signed the original Social Security Act in 1935, he insisted that the surpluses be held only in U.S. government bonds backed by the full faith and credit of the government.
  President Roosevelt was well aware of the 1929 crash of the stock market, which had only recovered a portion of its losses by 1935. His prudent policy has worked well indeed.
  In contrast, pension funds managed by city and state comptrollers, particularly in times of flat or declining stock prices and unsound investments, require replenishment from government general revenues.
  In 2001, for example, Mayor Rudolph Giuliani had to budget $701 million over a five-year period to compensate for bad investments by the trustees of the New York City employees pension fund. As a retired state civil servant, I've seen my monthly Social Security check grow while my state pension remained static.
  The debate about privatization is based on erroneous assumptions. It is widely accepted that the alleged difficulties faced by the Social Security trust fund are due to the so-called baby boomers who will begin to retire in growing numbers over the next decade.
  I suspect at least some of the Republican and Democratic politicians expressing alarm over the baby-boom problem are more motivated by the prospect of large-scale campaign contributions likely if Social Security surplus funds could be invested in the stock market.
  Not too many people are aware that the trustee appointees of President Bush based their gloomy forecasts on an actuarial report predicting significant decline in productivity, steady 5.5-percent unemployment, depression-level economic growth and lower fertility rates.
  The Clinton trustees approved an actuarial report in 1994 utilizing even more dismal projections, including constant 6-percent unemployment.
  But each year Social Security actuaries present the fund's trustees with two other sets of assumptions to choose among, one more pessimistic and the other more optimistic. The most recent trustees report admits that under one group of actuarial inferences the fund would actually accumulate a surplus in the vicinity of $15 trillion by 2042.
  Speculating in stocks has proved costly for many city, state, county, union and management pension funds.
  On the other hand, the Social Security trust fund has nearly quadrupled, from $436 billion in 1994 when the "Save Social Security" outcry began to more than $1.6 trillion in September of 2004.
  One reason for the healthy growth of Social Security is what the 20th-century economist John Maynard Keynes called the beauty of compound interest.
  Currently, the effective annual rate of interest in the Social Security portfolio is 6 percent. Stocks are poor for compounding because dividends rarely exceed 1.5 percent, and stock appreciation cannot be compounded.
  In light of the sketchy information filtered through Presidents Bush and Clinton as a basis for their campaigns to save Social Security and the obvious risks inherent in investing Social Security surpluses in the stock market, it might be a good idea for Congress and the media to analyze all the actuarial reports prepared by the Social Security Administration before jumping on the privatization bandwagon.
  If the Social Security trust fund is actually in good financial shape and holds a $1.6 trillion surplus, serious consideration should be given to alleviating some of the hardship senior citizens are now experiencing due to sharp increases in health care costs imposed by the Bush administration starting this month.
  An offsetting 5-percent increase in monthly Social Security payments poses little threat to the solvency of a trust fund growing at the rate of more than 10 percent every year.
  Easing our seniors' pain today is a small price to pay and won't require the drastic overhaul of a retirement system that is set up to work for us all for years to come.

George N. Spitz, is a retired state auditor of city programs. He is on the board of the Civil Service Merit Council.

The Progressive, Pro-Peace choice in the New York City Democratic Primary for City Council 5th District on Manhattan’s Upper East Side and Roosevelt Island.