Not long ago, the Wall Street Journal called privatizing Social Security "the biggest bonanza in the history of the mutual fund industry." No wonder: By diverting 2 percent of payroll from Social Security into private accounts, the government could shunt $60 billion a year into the coffers of investment firms, banks, and insurance companies. And some advocates of privatization, such as the libertarian Cato Institute, want to replace Social Security entirely with individual, IRA-like accounts that would end the government's role once and for all in providing for the security of retirees.
Proposals for privatizing Social Security have circulated on the right-wing margins of American politics for decades. Not even the Reagan administration would embrace the idea. For years, tampering with Social Security was considered politically untouchable. The 43 million people who typically receive 30 to 40 percent of their income from the program—many of them members of the American Association of Retired Persons (AARP)—represent one of the most formidable forces in American politics. Advocates of privatization could also never get past one basic problem: How could Social Security taxes go into individual investment accounts when the money was immediately being used to pay benefits to retirees?
Now two things have changed. A projected long-term deficit in Social Security accounts is opening the door to more radical remedy. And a new coalition in support of privatization is taking shape, backed by financial interests that see an unprecedented opportunity in the diversion of Social Security trust funds. These business and finance groups are now pouring money into right-wing think tank efforts, lobbying efforts, and publicity aimed at putting privatization on the national agenda. When they are finished, expect the privatization bandwagon to start rolling down your street.
It is not surprising to find the Cato Institute in the midst of the swirl to privatize Social Security; there aren't many things government does that Cato doesn't think private markets can do better. In 1995, for Social Security's 60th anniversary, the Cato Institute began its "Project on Social Security Privatization," with a goal of raising $2 million to support a nationwide effort to raise public awareness of a crisis in the system, focusing on the Hill, the media, and public opinion. "We've already raised about half of what we expected to raise," says Michael Tanner, director of health and welfare studies at Cato. "We're receiving support from the financial community, from the investment community, from the insurance community. We're receiving support from large employers concerned about payroll tax increases. And from foundations."
Cato's project is cochaired by Jose Pinera, the former labor minister of Chile who privatized that country's pension system, and William Shipman of State Street Global Advisors, an investment company. State Street itself is taking "a bold stance in favor of private investment options for Social Security revenues," according to its director for industry affairs, Lenny Glynn. To provide political advice, the bank has hired John Sasso, a Democratic consultant who used to be Michael Dukakis's top strategist. Cato's chief backers also include other banks, such as Bank of America, Citicorp, and Chase, as well as insurers and securities firms like Salomon Brothers.
Yet the Cato Institute is so insistent on radical change in Social Security that some of the players, such as the Investment Company Institute (ICI), the Securities Industry Association (SIA), and the National Association of Manufacturers (NAM), appear to be reluctant to get too close to it. Thus ICI has endorsed the more moderate legislation introduced in the Senate by Democrat Robert Kerrey of Nebraska and Republican Alan Simpson of Wyoming, which would channel 2 percent of payroll into private investment accounts [see accompanying article, "Social Security on the Table," page 76]. Last year, testifying in support of the Kerrey-Simpson plan, ICI's Matthew Fink warned that urgent action was needed to deal with a "widespread sense of 'no confidence' in the current Social Security system." Not only would workers get a better return if their money were invested in the Personal Investment Plans (PIPs) envisioned in the bill, but "the shifting of these funds from Treasuries into stocks, bonds and mutual funds would provide much needed capital for private industry," said Fink. ICI believes that anything more than 2 percent would lead to insupportable transition costs, draining too much money from the system and making it impossible to pay benefits to current retirees.
Of course, many experts on Social Security see the situation much differently. In testimony before a Senate subcommittee in March, Brookings Institution economist Henry Aaron compared projected shortfalls in Social Security to earlier ones that were dealt with by making moderate adjustments in the system. In an interview, Aaron warned of the substantial costs associated with privatization because of the fees that would go to Wall Street brokerages and other purveyors of financial instruments and the overhead associated with maintaining millions of private accounts. These costs, Aaron argues, amount to a "head tax," which would fall more heavily on low-income people. Of course, if the securities industry didn't back privatization, Aaron says, "they'd be nuts. One hundred ten million workers, that's a lot of customers."
PUTTING SOCIAL SECURITY IN PLAY
While big business and Wall Street are quietly setting the wheels in motion, a more subtle—and perhaps more significant—effort is also underway to shape public discussion. That effort includes grassroots work, media relations, and publicity stunts. In January, for example, the U.S. Jaycees, an Oklahoma-based organization of under-40 entrepreneurs, launched a nationwide bus tour to promote the need for Social Security reform, including privatization. More public agitation is in the offing because business proponents of Social Security privatization do not believe that it can move forward until Americans are convinced that Social Security is bankrupt and mismanaged by the government and that the private sector ought to take the whole thing over.
The most sophisticated seed money in this arena derives from the J.M. Kaplan Fund in New York. About a year ago, the Kaplan Fund decided that though a lot of people were starting to take a look at privatization of Social Security in one form or another, "nobody knew each other," says Chuck Hamilton of Kaplan. So they hired Carl Helstrom, a consultant with Atlas Economic Research Foundation in Fairfax, Virginia, a pro-market group, to conduct a study of "who's doing what," Hamilton says. The intention was to find worthy recipients of grant money able to take the message of Social Security privatization to U.S. opinion leaders, businessmen, the media, and academics. Eventually Kaplan made a series of four grants.
- One grant went to the National Center for Policy Analysis, a right-wing think tank in Dallas, Texas, headed by John Goodman, a longtime advocate of turning all government social welfare over to the private sector. Goodman is one of the chief authors of the concept of "medical savings accounts," which would replace conventional health insurance and Medicare as "super-IRAs" would replace Social Security. The Kaplan grant allowed Goodman's group to hold a series of briefings on Capitol Hill for members of Congress and their staffs.
- A second grant went to the Institute for Research on the Economics of Taxation, a right-wing think tank critical of federal taxation, for a series of briefings on the Social Security crisis held for executives in the financial services industry.
- A third grant went to Third Millennium, a group consisting of just 1,700 members that nonetheless purports to represent the unfortunately named Generation X. [See Heather R. McLeod, "The Sale of a Generation," TAP, Spring 1995.] In the debate over Social Security, Third Millennium is best known for a poll conducted by Newt Gingrich's favorite pollster, Frank Luntz—one of the architects of the Contract with America—that reported that more young Americans believe in flying saucers than in the future of Social Security. Third Millennium Executive Director Richard Thau is busily placing op-eds, making television appearances, speaking and testifying on Social Security issues and, he says, "trying to create a climate where young people could understand what the issue is about."
- And the fourth Kaplan Fund grant went to the National Development Council, whose chairman, Sam Beard, a voluble former Robert F. Kennedy aide, is seeking to create a grassroots drive to privatize Social Security. His model is Mothers Against Drunk Driving. But although, Beard says, "I'm taking money from everybody," he refuses to solicit backing from the securities and Wall Street companies that stand to benefit from the creation of tens of millions of IRA-like accounts. "If the securities industry pushes for this," he says, mixing metaphors, "they will be seen as money-hungry people wringing their hands like vultures. Ironically, if the securities people stay out of this, it would be much easier to sell it."
A survey that Beard has commissioned from Democratic pollster Celinda Lake and Republican Fred Steeper shows that Social Security privatization might win the support of Americans "who are angry with government, don't trust it, are concerned about our economic future, and are angry about taxes going up," according to Beard, citing familiar right-wing themes.
Interestingly, Kaplan did not fund the Cato Institute work, and Kaplan's Hamilton suggested that part of the reason is that Cato is part of the "public policy ghetto" and that "if this is identified as a Cato Institute idea, it's a dead issue." And he added that Cato's project is already well funded. However, both Beard and a representative of Third Millennium were members of the Cato project's advisory committee.
Yet another member of the Cato project advisory committee seeking to build grassroots support is Anne Canfield, a former General Electric financial lobbyist and Hill staffer who set up the Retirement Security Coalition in 1995. Working out of an office at McClure, Gerard and Neuenschwander in Washington, D.C., a lobbying firm set up by former Idaho Republican Senator James McClure and his aides, Canfield's group proposes to "sell this through the power of ideas," winning support from people under age 50. Though she is a savvy Washington insider with strong links to the business and financial groups working the issue on the Hill, Canfield hopes to build a constituency for privatization of Social Security among ordinary citizens, and she has already created a World Wide Web page on the Internet and is planning an advertising campaign.
THE WIDENING CIRCLE
As the privatization campaign develops, many other groups are tentatively exploring their potential role. The Retirement Savings Network, a business coalition established to deal with pension issues, will shortly begin discussing Social Security reform, cautiously at first, says Steve Elkins, director of employee benefits policy at the National Association of Manufacturers. The network also includes the U.S. Chamber of Commerce, ICI, the Securities Industry Association, the American Council of Life Insurance, the ERISA Industry Center, and the Association of Private Pension and Welfare Plans.
In late 1994 NAM established a Social Security task force chaired by Walter Maher, Washington representative for Chrysler, and including Bill Modahl, tax counsel for Digital Equipment, who will also chair a parallel task force just getting underway at the U.S. Chamber of Commerce. Though NAM says that it is too early in the debate for the group to support a particular proposal, it is concerned about the impact of increased payroll taxes on large employers, according to Elkins, who favors privatization. And although he says that NAM has yet to begin lobbying the issue in Congress, Elkins says that he is watching the issue closely on the Hill, predicting that the situation in the Senate will change "very dramatically" this spring as Senate leaders move to support one version or another of the privatization proposals that are circulating.
In addition to the task forces at NAM and the U.S. Chamber, the Fortune 500-based Business Roundtable is also getting its own task force off the ground. And at the American Council of Life Insurance, Ken Vest says that the industry group met recently "to set up the means to study various ideas on privatization," noting that a lot of insurance companies are in the business of managing annuities and 401 (k) plans, which could receive a steady flow of retirement money if Social Security is privatized.
In Washington, the conventional wisdom seems to be that it is too early for politicians to take the lead on Social Security privatization. Newt Gingrich has suggested that the country is not yet mature enough to discuss Social Security, but that the next Congress will have to address the issue after the 1996 election. The leader of privatization efforts in the House is Arizona Republican Jim Kolbe, head of the Public Pension Reform Caucus. The caucus is comprised largely of ideological freshman Republicans and a few Democrats, such as Texas Representative Charles Stenholm, who cochairs the group. Kolbe notes that "very quietly, in the background" the GOP leadership is supporting the effort. "The speaker has been very helpful to us in our strategy," he says, but he adds that the pressure of election-year politics will take Social Security off the table for presidential discussion. "I would discourage the presidential candidates from talking about it. There's no sense in sending someone out to be slaughtered," he says.
Some groups supporting privatization are also worried about the image they are projecting. ICI was rocked by a Wall Street Journal article last February that noted that ICI and its member firms were virtually salivating at the prospect of "a pot of money worth trillions of dollars." That article "stopped everyone here in their tracks," says an ICI source. "We all said, 'Oh my God, we're too far out in front of it.'" Another ICI official, Kathy Rabon, says that the Institute will await the results of a study it has commissioned before going any further.
Almost everyone involved in the issue says that it will be at least 1997 before anything serious happens on Capitol Hill, and probably another several years before any changes are enacted into law. "It's way too early," says a veteran Capitol Hill watcher of Social Security who insisted on anonymity. "Somebody really serious has to get behind it first." He adds that the biggest problem in any proposal for privatization—and one acknowledged by proponents—is that by funneling money into private accounts, the federal government would siphon off cash needed to cover the deficit now. (Surpluses in the Social Security trust funds offset other government expenditures.) "We're going to tell the government to collect money and ship it off to Wells Fargo and Salomon Brothers? Where are you going to get the $60 billion from?" he asks. Clearly, taxes would have to be raised or spending cut even further than proposed under current deficit-reduction plans. That's one of the nasty little secrets that you won't see advertised in the coming privatization blitz.
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