[Congressional Record Volume 143, Number 12 (Tuesday, February 4, 1997)]
[Extensions of Remarks]
[Page E129]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




              SOCIAL SECURITY PRIVATIZATION--A RED HERRING

                                 ______
                                 

                          HON. JOHN D. DINGELL

                              of michigan

                    in the house of representatives

                       Tuesday, February 4, 1997

  Mr. DINGELL. Mr. Speaker, I rise today to share with you the 
following article from the January 14, 1997, business section of the 
Washington Post. Written by Allan Sloan, this article accurately 
highlights some of the pitfalls with Social Security privatization. The 
golden goose, which some regard the stock market to be, may, in fact, 
be a red herring. Mr. Speaker, I ask that the above-referenced 
newspaper article be printed in the Record at this point.

      In Stocks and Social Security, a Free Lunch Is Pure Fantasy

       If you're so worried about Social Security that you stay 
     awake nights, cheer up. A solution is at hand. To ensure a 
     good night's slumber, sit down at bedtime with the report 
     issued last week by the Advisory Council on Social Security. 
     This 752-page, two-volume opus is so complicated, technical 
     and jargon-laden that it makes your average computer 
     instruction manual look like a comic book.
       By now, you're probably over-familiar with the details. The 
     council, formed in 1994, was expected to propose rescuing 
     Social Security by raising taxes and trimming benefits. 
     Surprise! Instead of relying on this traditional but painful 
     fix, the council proposed to ``reform'' the system's 
     retirement and disability programs by betting trillions of 
     dollars on stocks. That's trillions, with a ``t.''
       Talk about the temptations of a bull market. Rather than 
     bite the bullet on Social Security, we can all chow down on a 
     free lunch. Stock market profits will keep baby boomers fat 
     and happy in retirement; Generation X's taxes won't go 
     through the roof to make the boomers' golden years glorious.
       But you know what? It's all fantasy. Lots of Americans 
     favor putting some of the funds into stocks. But if we're 
     silly enough to try it, it won't work. Let's back up a bit 
     before explaining why.
       The free lunch proposed by the council comes in three 
     varieties, because the members couldn't agree on the most 
     appetizing dish. The first would make the federal government 
     the world's biggest stockholder. The second would establish a 
     new 1.6 percent tax on Social Security-covered wages and 
     require people to invest the money in one of a half dozen or 
     so government-sponsored funds. The third would require people 
     to save 5 percent of Social Security wages in accounts 
     holding any kind of publicly traded securities they wish, 
     would have Uncle Sam borrow as much as $7 trillion to pay 
     benefits to make up for the money that would be invested 
     rather than redistributed to retirees, and would finance it 
     all with a 1.52 percent tax on top of the existing 12.4 
     percent tax.
       Let's concentrate on the idea of putting the Social 
     Security fund in stocks, which seems more likely to be taken 
     seriously in Washington than the forced-savings approaches.
       What all three plans have in common is that they would 
     throw us willy-nilly into a high-stakes game of retirement 
     roulette, betting the nation's financial future (or the 
     futures of millions of individual retirees) on the stock 
     market. The council didn't start out to do this. Initially 
     its members tried to agree on a cuts-and-taxes fix. But some 
     members feared that sharp tax increases and benefit cutbacks 
     would erode Social Security's political base by making people 
     think the program is a lousy investment.
       How did the council's biggest faction--6 of 13 members--
     decide to put 40 percent of the Social Security fund in 
     stocks? ``That's the amount that makes things come out,'' 
     says panel member Robert Ball, the former Social Security 
     commissioner who's pushing this plan hard.
       Ball says it's perfectly safe for Social Security to have 
     its money in the hundreds (or thousands) of stocks that make 
     up an index such as the Standard & Poor's 500 or the Russell 
     3000. Why does Ball say that's safe? Because unlike 
     individual investors, the government won't panic during 
     downturns or be forced to liquidate its holdings at low 
     prices to generate cash.
       Unfortunately, he's wrong. The Treasury would in fact find 
     itself a few trillion dollars in the hole if stocks merely 
     rose at a rate lower than the council projects.
       Here's the problem. In a triumph of statistic over common 
     sense, the council's plans all assume that stock prices will 
     rise more quickly than they have in the past. A dubious 
     prospect, considering that stock prices already are at such 
     nosebleed-high levels that even many bulls have gotten 
     nervous stomachs.
       Anyone who has studied financial history, even a little, 
     gets very nervous when people confidently predict what stock 
     prices will be in 75 years. Betting that stock prices will 
     keep rising rapidly because they have been rising rapidly 
     ``is like the guys on Noah's ark projecting six more weeks of 
     rain on the 39th day,'' says Joseph Rosenberg, chief 
     investment strategist at Loews Corp. and one of Wall Street's 
     most respected investors. ``You can't believe how dumb a 
     government can be.''
       Rosenberg points out that stocks don't necessarily spring 
     back quickly from deep drops the way they did after the 1987 
     market crash. Stocks didn't regain their 1929 highs until 
     1954, Rosenberg notes, and it took almost 10 years for stocks 
     to match the highs they reached in 1973.
       But even absent a 1929 or 1973 disaster, stocks aren't 
     likely to make the money the council projects.
       Here's why. Combining several different assumptions, the 
     council projects that inflation will be 4 percent a year, 
     bonds will yield 2.3 percentage points more than inflation 
     and stocks will produce 7 percent more. That works out to 
     6.39 percent for bonds and 11.28 percent for stocks, says 
     Stephen Goss, deputy chief actuary of the Social Security 
     Administration. The stock number includes capital gains and 
     reinvested dividends.
       Now, 11.28 percent a year may not strike you as a big 
     hurdle, given that stocks earned three times 11.28 in 1995 
     and twice as much last year. But it's a huge number. Consider 
     Corporate America's expectations of the market. Greenwich 
     Associates, a consulting firm, says the corporate pension 
     managers it surveyed expect stocks to average 9.6 percent 
     annually for the next five years.
       Maybe my harping on the 11.28 percent projected return for 
     stocks is wasting your time. But look what happens when 
     numbers differ by small amounts over decades. Let's compare 
     the 11.28 percent a year the council projects with the 10.71 
     percent a year that Ibbotson Associates says stocks earned 
     from 1926 through 1996, a 71-year period.
       Do the math--don't try it without a compounding 
     calculator--and you see that $1 invested in 1926 had become 
     $1,372 by last Dec. 31. But if stocks had earned the 
     council's projected 11.28 percent, our dollar would have 
     grown to $1,975. A big difference, eh? It means that if 
     stocks rise for the next 71 years at the Ibbotson rate 
     instead of the council's rate, Social Security's stock 
     portfolio would be worth 30 percent less than the council 
     projects.
       What terrifies me and many Wall Street types is the 
     prospect of the government pounding into the stock market 
     running prices to the moon with automatic buying, and then 
     having the market crash on us for some reason that we can't 
     yet foresee.
       It's one thing for someone like me, who makes a very good 
     living, to bet on the stock market. I can afford to lose. But 
     betting the federal budget on stocks is madness. And forcing 
     millions of people who don't know stocks from smocks to let 
     the market determine whether their retirement dinners will 
     consist of cat food or caviar doesn't seem like the way we 
     should treat people. If we're going to fix Social Security, 
     let's do the boring, painful things that we know will work. 
     And let's try to remember the prime rule of economics. There 
     ain't no such thing as a free lunch.

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