O'Neill Faults 'No Assets' Social Security

By: Glenn Kessler
The Washington Post, June 19, 2001
Treasury Secretary Paul H. O'Neill launched a broad attack on the current Social Security system today, saying it has "no assets" and leaves Americans vulnerable to the whim of "someone else's promise."

Speaking to a group of financial executives in a small wood-paneled room at the top of the World Trade Center, O'Neill laid out the emerging themes of the Bush administration's push to overhaul the program. He said that allowing workers to divert some of their payroll contributions to stock and bond investments in an individual account would give then "real money in a real account" that could be passed on to their heirs.

A former corporate executive, O'Neill said that if he and his managers had run their pension funds the way the government ran Social Security, "we'd all be in jail" because "we would not be permitted to have pension-fund obligations without assets behind them." The choice, O'Neill asserted, was between "an account with money in it or an account without any money in it."

O'Neill spoke at an organizational lunch of the Coalition for American Financial Security, a group that favors partial privatization of Social Security and plans to launch educational efforts to complement the work of a commission appointed by Bush to make recommendations on a privatization plan. The group was founded by Frank Russell Co., a Tacoma, Wash., subsidiary of Northwestern Mutual Life Insurance Co. that helps corporations allocate pension money among fund managers.

Many of the few dozen executives at the lunch were Frank Russell clients or other fund managers, with only a smattering of representatives from big Wall Street firms that might profit from privatization. An adviser to some big firms said they were wary of being too closely associated with the push for Social Security privatization, and so were unlikely to join the effort.

Speaking in a conversational manner without notes, O'Neill spent about 15 minutes laying out his critique of the current system and then took questions for about 15 minutes. In the morning, he met behind closed doors with the board of Third Millennium, an advocacy group focused on young adults that also favors Social Security privatization.

"I come to you as managing trustee of Social Security," O'Neill said to the fund managers. "Today we have no assets in the trust fund. We have promises of the good faith and credit of the United States government that benefits will flow."

O'Neill's blunt description of Social Security, while widely shared among Republicans, is noteworthy because as managing trustee of Social Security, he signs the trustees' reports stating that the trust fund contains real assets. On Page 19 of the most recent report signed by O'Neill, for instance, the trustees listed more than 50 Treasury securities held by the trust fund totaling nearly $900 billion.

Social Security benefits now are paid with payroll taxes collected from current workers. Since more payroll taxes are being collected than necessary to pay benefits, the surplus funds are being used to pay down the publicly held debt while also being credited to the trust fund. The government has made a political commitment to honor the bonds held in the trust fund, which pay market rates of interest. Failure to make good on that promise might be regarded by financial markets as a default by the U.S. government.

But critics of the current system, such as O'Neill, argue that the trust funds are merely an accounting fiction that disguises the fact that in 15 years, payroll-tax collections will no longer cover promised benefits.

Some analysts disagreed with O'Neill's description of the trust-fund assets as essentially meaningless, especially when compared with stock investments. "A stock is a risky investment, while a government bond is as safe as Fort Knox," said Henry Aaron of the Brookings Institution. "It depends on who makes the promise."

O'Neill told the executives that Social Security was "a revolutionary idea for its time" but the looming retirement of the baby-boom generation makes it essential that action be taken now. "This is all about happy times and doing the right thing while our generation is able to act," he said, adding that "those who are against it just don't understand the facts."

After O'Neill left, Don Ezra, chairman of the group, warned the crowd that the transition to a new system was likely to be costly and difficult. "There is no painless solution," he said.

One concern of the group is that some proposals for reforming Social Security could adversely affect the functioning of capital markets, which in turn would harm the business of pension-fund managers. So they are eager to have a voice at the table if a new system is designed.