We are the new media.
 | |  | |  | |  | |  |
By Tom Elia
May 3, 2005
The New Editor
The conventional wisdom has it that President Bush's proposal for private accounts is a
political and policy loser. Politically, this may be true in the short term.
However, as it plays out over the long term, this view is quite simply misinformed, largely
because of two factors: the Democrats' decades-long political demagoguery on Social
Security and what is an essentially innumerate journalistic class whose maladroit handling of
statistical data is illustrated on a daily basis.
Instead, what is more likely is the Democratic Party's almost uniform opposition to private
accounts will be viewed in the future as one of the two or three biggest domestic policy and
political blunders in the last couple of generations.
This is because in the debate over Social Security reform, and more specifically private
accounts, a key reality has been almost completely ignored: Social Security as it is currently
arranged is -- operationally -- woefully far from being efficient.
In order to prove this point, only one illustration is necessary. Overall, the system pays out
an average of less than $1,000 per month per recipient -- less than $1,000 per month. This
result is achieved through a tax rate of 12.4% of income, or an average payment of $400 a
month per taxpayer.
The notion that no operational changes should be made to a system paying an average benefit
of less than $1,000 a month -- after 40 years of payments that average $400 a month -- is
nothing short of ludicrous.
Additionally, that 20%-25% of Social Security recipients receive the program's benefits as
their sole source of income should make everyone take the inefficiency of the system
seriously.
Of course we can do better than this. The almost 80-year historical real rate of return (this
means adjusted for inflation) on a conservative investment blend (55% in stock index funds
and 45% bonds) is about 4.75%. (Stocks have averaged a 7% real return the last 80 years,
bonds somewhere between 2%-3%.)
Investing $400 per month for 40 years at a 4.75% rate of return would result in a nest egg of
over $500,000 for the average Social Security recipient.
At just three percent, the interest alone on a retiree's nest egg would exceed the current
average Social Security payout. More importantly, the beneficiary would have access to the
resulting capital accrued over the years -- something not possible in the current system.
Critics claim that investing in the markets is too risky -- a claim directly contradicted by the
empirical evidence. Back to 1926, there has been no 15-year period where the stock market
as a whole has lost money, and no 20-year period where the stock market delivered less than
a three percent return. To the extent we are talking about a 40-year period of investing, this
point seems lost on opponents of private accounts.
The biggest winners in such a system would be working class and lower middle class
people, who have little opportunity to accumulate capital. Yet the Democratic Party, which
claims the mantle of Protector of the Little Guy, stands almost uniformly opposed to private
accounts. This is nothing short of scandalous.
It is also deeply hypocritical.
Consider two examples of the hypocrisy: the private investments of public sector employees
and those of the Democratic Party's leadership in Washington.
First, according to data from the Federal Reserve, the total amount of market investments of
all state, local, and federal employees is about $2 trillion. This money is basically invested
55% in stocks and 45% in bonds and cash. The portion invested in stocks accounts for just
less than 10% of the entire capitalization of all publicly traded equities. The portion invested
in bonds is likewise about 10% of the entire value of all federal debt.
If it's okay for government workers to invest in the markets, why is their union leadership
arguing so strongly against enabling the rest of the country from doing the very same thing?
Quite obviously, it is not for financial reasons that the unions oppose reform; it is for political
reasons.
Second, and perhaps most galling, is the data culled from the federal disclosure forms of six
of the top Democratic Party leaders in Congress.
For 2002, House Minority Leader Nancy Pelosi (CA) reported assets of somewhere between
$20-$100 million, with annual income from investments of at least $3 million.
Chairman of the Democratic Congressional Campaign Committee Rahm Emanuel (IL)
reported a net worth of at least $9 million, with annual income in interest and dividends of
almost $400,000 per year. (Rep. Emanuel, who made almost $10 million in 2002,
accumulated the bulk of his net worth between 1999-2002 after serving in the Clinton
Administration, when, with no experience in the field, he was hired as an investment banker
at Dresdner Kleinwort Wasserstein. There is nothing illegal in this, as many trade-off of
previous government contacts and reap big rewards. Besides, benefiting from politics seems
to run in Emanuel's family: his brother Ari was filmmaker Michael Moore's agent for the
movie "Fahrenheit 9/11.")
In comparison, House Minority Whip Steny Hoyer (MD) reported a more modest net worth
of at least $265,000, but interestingly, in addition to his six-figure congressional salary, he
receives an annual pension of over $17,000 a year for having served 12 years in the
Maryland State Senate (his pension for twelve years of service is almost 50% higher than
that received by the average Social Security beneficiary).
Senate Minority Leader Harry Reid (NV) reported a net worth of at least $800,000, from
which he reaped $11,700 in income (like Rep. Hoyer's pension from the state of Maryland,
this amount of income alone exceeds the average Social Security recipient's benefit). But of
more acute interest is the money that members Reid's family have made lobbying both the
state of Nevada and the federal government. According to a 2003 article in the Los Angeles
Times, the two firms Sen. Reid's four sons and his son-in-law work for made in excess of
$2 million in lobbying fees between 2000-2003, and represent nearly all of the major
industries in Nevada (at the time of the article his four sons all worked for the state's largest
law firm; his son-in-law works for a Washington, DC firm).
Democratic Senate Minority Whip Richard Durbin (IL) reported a 2002 net worth of at least
$800,000. He and his wife (a political consultant) combined to make more than $210,000 in
2002, and own a condominium on Chicago's Lake Shore Drive in addition to another home in
Illinois.
Democratic Senatorial Campaign chair Charles Schumer (NY) reported a net worth of at
least $250,000 (this apparently does not include his home in Brooklyn). Schumer and his
wife (an employee of New York City) reported a combined 2002 income of about $300,000.
What becomes obvious after reviewing the financial data contained in the disclosure forms is
that none of these people will ever depend on Social Security benefits -- even without their
incredible congressional retirement packages.
Yet none of these Democratic congressional leaders seem to think that average benefits of
less than $1,000 per month for Social Security beneficiaries is anything to worry themselves
about.
After all, political considerations for these Democrats trump everything, including it seems,
the welfare of the very people they claim to champion. Especially when they've already got
theirs.
Tom Elia is a contributing editor for The New Editor.
Paul Geary
David Rogers