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Risk, Risk, Risk
AARP on Social Security.


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Jim Geraghty

The American Association of Retired Persons held a press briefing last week, outlining its legislative agenda for the coming year.

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The short version: They oppose just about any form of President Bush’s proposal to allow workers the option of diverting some of their Social Security taxes into personal retirement accounts and investing those funds. As for tax hikes, the AARP is okay with them.

The AARP–an organization “dedicated to making life better for people 50 and over” is pledging to fight tooth and nail any effort to allow today’s young workers to put aside some of their Social Security taxes into a private account. Instead, they’re attempting to nudge Congress towards hiking taxes on today’s workers.

What was striking about the statements by AARP CEO Bill Novelli, AARP president Marie F. Smith, and other officials was how terrifying they made the risks of investment sound, while speaking remarkably casually about the economic consequences of hiking taxes. Somewhere Al Gore, fan of the relentless “risky scheme” charge, is smiling.

A reporter asked how the AARP could dismiss stock-market investing as too risky when it has grown consistently over any 20-year-period, even in its worst years. John Rother, the AARP’s director of policy and strategy, responded, “There are many, many risks… like any mutual fund says, past performance is no guarantee of future return.”

To hammer home their message, AARP has launched an ad campaign featuring the argument, “Winners and losers are stock market terms. Do you really want them to become retirement terms?” Another ad depicts a man and woman in their early 40s who say, “If we feel like gambling, we’ll play the slots.”

The advertising does not feature crooked carnival barkers and three-card-monte games–yet.

The AARP readily concedes that the thorny issue of Social Security’s long-term solvency lacks any consensus, and its background briefing concisely explains ten different options that have been proposed by policy wonks on both the left and the right.

The organization objects to four: creating “carve-out private accounts” that would allow workers to invest part of their Social Security taxes; reducing cost-of-living adjustments; increasing the retirement age; and means-testing.

AARP gives the thumbs up to three ideas: increasing the amount of wages subject to Social Security taxes; diversifying a portion of the Trust Fund assets to increase return; and adding newly hired state and local workers to the Social Security tax system instead of to their current government-pension system.

Currently, according to the AARP’s figures, 85 percent of total wages nationwide are taxed for Social Security, limited to the first $90,000 a worker earns. Any amount higher than that does not require Social Security taxes. AARP proposes a new cap of $140,000, phased in over ten years.

Of course, this is a tax increase not just on workers making more than $90,000, but on their employers as well, who pay the other 6.2 percent.

The AARP neither endorsed nor criticized proposals to raise the Social Security tax by one-half a percentage point (split between the employer and the employee), to increase the number of work years used in calculating benefit formulas from 35 to 38 (thus lowering the benefits), and to index the starting benefit level for “average longevity,” resulting in lower benefits for retirees starting in 2018.

In fortuitous timing, two editorial contributors to that morning’s New York Times also took a whack at Bush’s Social Security positions, echoing the two favorite themes–that investments are too risky, and that raising taxes is a better idea.

Barry Schwartz, a psychology professor at Swarthmore College, also echoed the same argument: It’s possible for stocks to go down, so they’re too risky.

For starters, there is no guarantee that equities will return more than Treasury bills. One of the reasons that equities have a higher rate of return than other types of investments is that investors have to be compensated for taking risks. Perhaps equities will outperform Treasury bills in the long term but that doesn’t mean that they will be outperforming Treasury bills at the specific moment you retire.

For example, a person who retired in 2000 after a lifetime of investing half in stocks and half in bonds would have had 50 percent more in his account than a person making the same investments who retired in 2003. A difference like this could mean that the lucky retiree can afford both food and medicine while the unlucky one must choose between them.

He finishes by charging that the Bush administration has been dishonest about the program’s risks, and saying that if they were fully informed, “the American people would reject this effort to transform their ‘old-age insurance’ into another opportunity to roll the dice in the investment casino.”

Gene Sperling, national economic adviser to Clinton from 1997 to 2001, puts out an alternative that conservatives might find a disappointing substitute to Bush’s proposals, but not a bad idea in and of itself: creating a universal 401(k) to supplement Social Security, “with the government matching contributions from moderate and lower-income workers.”

If one of the reasons for conservative enthusiasm about private accounts is that the new system would turn every American into an investor with a stake in the markets and continued economic growth, then Sperling’s proposal could similarly bring the rest of American workers into the “investor class.”

But Sperling suggests financing this idea by keeping the set-to-expire “death tax” on estates worth more than $5 million. Then, in the next-to-last paragraph, he calls on President Bush to “propose a 3 percent surcharge on all income over $200,000–whether from earnings, dividends or capital gains.”

Does this tune sound familiar? “Raise taxes, raise taxes, raise taxes…”

Rother said he did not expect President Bush to find many Democrats willing to sign onto any partial-privatization proposal.

“The Democrats who would have been most open to proposals like this, the John Breauxs and the Charlie Stenholms, just left,” Rother said. “If Bush finds one Democrat to sign on, then it’s not really bipartisan. Bipartisan means serious support in both parties. And there are quite a few Republicans who have their problems with this idea, and they probably will continue to raise their objections in public.”



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