Social Insecurity: The Campaign to Take the System Private

"Workers carry a passbook in their back pockets because they are capitalists," Jose Pinera, Chile's ex-labor minister turned after-dinner speaker, tells his audience some 150 Wall Street heavies and assorted others who've come to the Waldorf-Astoria for lunch and a seminar on economics and Social Security served up by the Cato Institute, the libertarian think tank. Pinera's talk is dessert, a primer on the Chilean pension system. "We have made a nation of owners," Pinera says. "We've changed the concept of retirement." He throws out some fiscal details about the Chilean way of retiring and concludes, "I'm a firm believer this can be done in the United States." A guest from another think tank is somewhat incredulous: "We're going to look at a Third World country as a model? People aren't likely to buy it."

But Cato is betting heavily that they will, and the example of peasants in the Andes flashing their passbooks is not so far-fetched. Those assembled in the Waldorf ballroom didn't need to be sold on capitalism, of course; they needed to be sold on the idea of tearing up Social Security. More to the point, they needed to be so convinced that they would open their checkbooks and contribute to Cato's Project on Social Security Privatization, which, if successful, will help convert Social Security from a social insurance plan that provides a floor of protection for every retiree to an every-man-for-himself arrangement of private accounts that will make retirement income dependent on how much and how well individuals invest.

Cato is at the point of a rapidly growing phalanx of those whose agendas would advance mightily from such a change: Wall Street investment firms and mutual fund companies; politicians willing to accept their money; right-wing think tanks that want the government out of everything; conservative foundations that are funding them; front groups that have signed on to the cause; and a complacent, unskeptical press busy circulating misstatements that promote their arguments. Theirs is not so much a movement as an attempted bank heist, to rob the American people of a perfectly good social insurance program for the sake of ideology and profit. Some of the money from payroll taxes would be channeled to financial middlemen who could get their hands on $ l 50 billion of new money each year if just 5 percentage points of Social Security taxes were privatized. That is the proposal being pushed by one faction of the divided Social Security Advisory Council, a thirteen-member panel appointed in 1994 by Secretary of Health and Human Services Donna Shalala, which issued its report to much fanfare on January 6. That amount would also include substantial management fees that could be charged for overseeing millions of small accounts if the Chilean model, which rakes off about 13 percent in management and administrative expenses, were followed. (By contrast, Social Security spends slightly less than l percent for such expenses.)

Cato and others have tried before to stir up interest in demolishing Social Security. This time, though, they are capitalizing on Social Security's long-term demographic problem and using it as the centerpiece of their assault. Because there will be relatively fewer workers to support more retirees, the system will be out of actuarial balance by 2029, when the trust funds will be empty and payroll taxes will be insufficient to pay projected benefits. The l 996 trustees' report noted the problem and said that an immediate 2.2 percent increase in payroll taxes (about l percent on employees and l percent on employers) would restore balance for the next seventy-five years—a relatively simple fix.

Some solutions proposed by another faction of the balkanized Social Security Advisory Council would keep the system sound without dismantling it. Those include a package of small benefit cuts, tax increases and expansion of coverage to all state and local government workers, which would be nearly equivalent to the required increase in payroll taxes. This group, led by Robert Ball, a former commissioner of the Social Security Administration, also recommended studying the feasibility of investing part of the Social Security trust funds in stocks. Many on the council, however, favor far more drastic measures, which include varying degrees of privatization. They are calling for radical surgery on the system—an unnecessary operation that could push millions of the elderly and disabled back into poverty, which Social Security has largely erased among those groups. "The American public has never been asked if it would pay 1 percent more and put this to rest for another seventy-five years," says Teresa Ghilarducci, an economist at Notre Dame. "Wall Street would not make a cent out of preserving the current system."

To date, Cato has collected $2 million for its project, one-fourth of it from Wall Street firms. The New York seminars have been part of a series of fifteen or so that Cato has held to promote its project. Pinera, who works three months of the year for Cato, is often the featured speaker. Michael Tanner, the project's director, says that "substantial" donations have come from I.B.M. and Digital Equipment; American International Group, the insurance conglomerate that manages one of the Chilean investment funds; the brokerage firms Alex Brown & Sons and Quick & Reilly, whose interests are obvious; and American Express, which also has a brokerage business.

Co-chair of the privatization project, along with Pinera, is William Shipman, a principal of State Street Global Advisors, a division of the Boston-based State Street Bank, which is just as busy spreading the message. One of its latest efforts was a sixteen-page paid supplement in the November-December issue of Foreign Affairs. Shipman himself has made a score of speeches this year in the United States and abroad and given more than 100 radio interviews about what he calls "reasoned alternatives" to Social Security. And State Street money has bought more research—a $20,000 grant to the Progressive Policy Institute, the research arm of the Democratic Leadership Council, to study privatization (Robert Shapiro, vice president of the Progressive Policy Institute, has written favorably about the subject); $20,000 to Cato; $20,000 to the Employee Benefit Research Institute to evaluate different options; $5,000 to the National Academy of Social Insurance for more evaluation; and $25,000 to the Joan Shorenstein Center on the Press, Politics, and Public Policy for a look at the media's role.

"State Street has a history of getting involved," Shipman says. State Street, however, may have more than social commitment in mind. As the country's fourth-largest money management firm, if privatization were to succeed, State Street Global Advisors would add millions in custodial fees to those it collects on the $275 billion in pension assets it now manages in forty-six countries. Shipman told the magazine Pensions & Investments, "You could be staring at 130 million new accounts."

The Sales Pitch

To snag those accounts and push the government out of Social Security, privatizers are engaging in one of the most concerted, sophisticated and deceptive sales campaigns in recent times. Leila Bate, who is in charge of tax and budget policy at Citizens for a Sound Economy, one of the right wing think tanks that plans to spend "millions" on the effort, is candid: "Unless your average American buys into this, the best laid plans have no chance of success."

The usual antigovernment litany of wasted tax dollars and freeloading at the public trough doesn't work with Social Security. Practically everyone knows somebody who couldn't make it without Social Security's monthly check, and a spate of academic studies can't blunt that reality. So the best spin doctors have been called in to craft a plan that will make the average American buy in. Public Opinion Strategies offered some clues about what works when it announced poll results for Cato last August. Firm partner William Mclnturff explained that baby boomers participating in focus groups called Social Security a dodo bird or a dinosaur, pointing up an effective communications theme to be exploited. "We need a new program to answer the young," amplifies Tanner. "It's time to redesign Social Security for the future."

Jeanette Nordstrom, executive vice president of the National Center for Policy Analysis, which has promoted privatization since 1987 and plans to spend about $500,000 on it this year, says Social Security is a product line, and the books, studies, forums, breakfast meetings and media activities are all products within the line. "It's like marketing in a for-profit company," she says. "One hit cannot make a difference. The same clear, concise message must come from every direction." Woven into all those products is the argument that Social Security is in crisis and needs a radical makeover. Like all good sales pitches, this one panders to fear and appeals to greed. It also tries to break the strong tie between the taxes employees pay during their working years and their right to a pension later on.

Pandering to Fear: The gloom-and-doom pitch targets the young, who will be easy marks for a major overhaul if they believe Social Security won't be there for them. So the privatizers tell them that, over and over. New polls pick up those fears, and the results are used to reinforce the argument that the young have no confidence in the system, so it must be changed.

Headquartered in a shabby two-room office off Manhattan's Union Square, Third Millennium, a group of twentysomethings, is the lead messenger of doom. Its clever poll a few years ago by Mark Siegel and Republican pollster Frank Luntz found that young people were more likely to believe in U.F.O.s than in Social Security's viability. Thanks to the titillating question about U.F.O.s, the study blitzed the media. The poll lives on, its central findings recycled for the sales effort. Pinera, for example, referred to it in his Waldorf speech.

That poll made Third Millennium famous. Although it has but 2,000 members, a $300,000 budget and only three employees, the group has testified ten times before Congress and been crowned spokesman for the young by the media. Third Millennium is aiming for more ink this year, with a monograph called "Smashing the Tinkering Approach," funded by a $5,000 grant from the J.M. Kaplan Fund. It's a history of what Third Millennium executive director Richard Thau calls legislative "Band-Aids" that solved nothing. Thau says he will turn the introduction into an Op-Ed and send the full monograph to the press. "It's meant as more of a reference to set the stage for understanding," he says. More significantly, the effort dovetails with privatizers' unfolding strategy to undermine support for the more traditional fixes for Social Security, which have worked in the past and would work again. To cover even more bases, Cato is planning to circulate its own paper on why traditional reforms would be a bad idea.

Third Millennium's second-largest funder is Peter Peterson, the wealthy investment banker who has long waged a vendetta against Social Security and who has donated $17,500 to the group. Not surprisingly, Third Millennium's views on repairing Social Security mirror Peterson's: raising the retirement age and means-testing benefits, the latter a sure prescription for destroying the social insurance aspects of the program.

Third Millennium is by no means alone in "educating" the young. Citizens for a Sound Economy entertained Capitol Hill interns at a Social Security Youth Summit last summer. Says C.S.E.'s Bate, "They came away with a greater sense of the need to reform the system."

Appealing to greed: The greed appeal aims at everyone, and turns the notion of social insurance on its head. As an insurance program, Social Security was designed to protect workers and their families against the risk of poverty after a disabling illness, after the death of a spouse or in old age. It was never meant as a vehicle for accumulating wealth or creating millionaires.

But the privatizers and their retinue of economists are trying to make people believe Social Security is a ripoff because they could earn higher returns if their Social Security taxes were invested in the stock market. Some of the mathematical alchemy shows that even the lowest-paid workers can become wealthy. Sam Beard, president of the newly formed Economic Security 2000, a grass-roots organization, spreads the word to those would be millionaires with money he has raised from, among others, Cleveland businessman Peter Lewis; Teresa Heinz, widow of former Senator John Heinz; and Motorola executive committee chairman Bob Galvin.

Beard, who likes to trot out his liberal credentials (he once worked for Robert Kennedy), preaches the gospel of economic security for everyone via privatization. The J.M. Kaplan Fund gave Beard $25,000 to carry his message to minorities, low-income populations and women's groups. "Remodeling Social Security is a tremendous opportunity to restore economic justice," he says. "I can eliminate poverty for widows because I'm putting more money under the umbrella of Social Security."

His claim is as implausible as some of the calculations he throws into his Op-Eds, like the one he penned for the St. Petersburg Times this past fall. Beard wrote: "Existing payroll taxes for Social Security are 12.4 percent of wages—half paid by the employee, half by the employer. A worker earning $8,065 per year [presumably before paying income taxes] is already paying $83 per month, or $1,000 per year—into Social Security [counting the employer's contribution]. After forty-five years (a normal working lifetime from age 20 to 65), with annual set-asides and the magic of compound interest, the $8,000 worker can expect to accumulate $147,394 (today's value). Set aside $167 per month, you can expect $294,788; $250 per month, and accumulate $442,182—nearly half a million dollars (today's value) for you and your family."

"I would be excited about an $8,000 worker able to retire on $400,000," Beard says. So would the worker who found it possible to set aside $250 of the $672 earned each month and still manage to feeds shelter and clothe his or her family. Beard's calculation is deceptively large. He ignores the portion—nearly 2 percent of the 12.4 percent payroll tax that finances disability benefits and survivor payments to a worker's family, and skips over transition taxes that would need to be levied to cover benefits for people already retired or nearing retirement. More important, he doesn't reveal the monthly income a worker would actually receive from his windfall, the only fair comparison that can be made with Social Security benefits. While $400,000 would give a 65-year-old man a lifetime annuity of $3,274 a month and a 65-year-old woman $2,681 (based on a 4 percent real annual rate of return—assuming a nominal interest rate of 8 percent and providing a 4 percent COLA adjustment), the more realistic accumulation of $ 147,000 would give a man only $1,203 per month and a woman $985, amounts not much different from today's top benefit of about $1,200. (This calculation is based on a single life annuity and does not include any provision for a surviving spouse.)

Nor is there any hint that in Beard's schema the stock market might go down and high returns vanish. To consider that possibility, one has to look no further than the experience of the nation's largest life insurance companies—Prudential, New York Life, Mutual of New York—now embroiled in class action suits brought by policyholders who were "promised" pie-in-the-sky interest rates that never materialized on their cash-value policies.

Breaking the Link

F.D.R. knew that Social Security would someday be fair game. That's why he insisted on a payroll tax visible to all workers with every paycheck to establish their right to a pension. "Those taxes were never a problem of economics," Roosevelt later explained. "They are politics all the way through. We put those payroll contributions there so as to give the contributors a legal, moral and political right to collect their pensions. With those taxes in there, no damn politician can ever scrap my Social Security program."

And for sixty-two years that deftly forged connection made Social Security impervious to serious assault. But now it is under siege by the anti-entitlement crowd. By casting Social Security as the biggest entitlement— gobbling up too much of the federal budget and snuffing out economic growth—the anti-entitlement forces are sawing away at Roosevelt's link. Even the word "entitlement," now a staple in the political lexicon, connotes something people don't deserve; hence the notion of means testing—turning Social Security into a welfare program for only the truly needy.

That's the message preached by the Concord Coalition, the chief anti-entitlement crusader, which in just four years has risen from obscurity to become one of the leading influences on public policy. Founded by Peterson and former Senators Paul Tsongas and Warren Rudman, the organization now boasts a membership of 170,000 and a budget of nearly $3 million. Peterson, its president, has donated royalties from his first book to the organization and is listed in the latest annual report as a patron, which means he has given between $ 15,000 and $49,000.

Early in its history the Concord Coalition received a $ 100,000 grant from the Pew Charitable Trusts to develop the widely publicized Zero Deficit Plan, a blueprint for eliminating the federal deficit by 2002. It also got $50,000 grants from the Stuart and John M. Olin foundations to mobilize public opinion for eliminating the federal deficit and to create educational programs showing how entitlements fuel the deficit.

Concord has been educating ever since. Its Debt Clock tours county fairs, college campuses, rallies and schools, ticking away to show how fast the national debt is mounting. Students and community groups try their hand at its DebtBusters game, a role-playing exercise to balance the budget. The conclusion they reach, of course, is that it can’t be done without changing Social Security. The idea behind these efforts is "to bring people to the understanding that doing nothing is not an option," says executive director Martha Phillips. "When you start talking about what you can do, Social Security is part of the solution." While the Concord Coalition doesn't embrace privatization per se, its activities help erode confidence in the system and make the public and politicians receptive to major change.

To fortify politicians' courage as well—given that few would dare to touch the forbidden third rail—Cato helped establish the House caucus on public pension reform, offering information, discussion topics, speakers, even identifying potential members. "A caucus raises the visibility of the issue," says Cato's Tanner.

Money does that even more. The third rail of politics is no longer "untouchable," says Julie Domenick, a senior vice president of the Investment Company Institute (I.C.I.), which has given generously to Congressional members. Even members once considered unlikely to buy into Social Security reform are now showing interest. One lobbyist mentions Maryland Democratic Senator Barbara Mikulski. Since last May, Mikulski has received $26,250 in campaign contributions from employees of Alex Brown & Sons, the brokerage firm that is one of Cato's biggest boosters and a member of the l.C.I. Her office says the Senator will support "whatever keeps Social Security solvent."

The Investment Company Institute has also been good to Senator Bob Kerrey, the Nebraska Democrat and chief Congressional cheerleader for reform, who advocates a partial privatization of the system. Kerrey was the I.C.I.'s keynote speaker at its annual membership meeting last spring. Two days after the conference, the I.C.I.'s political action committee gave Kerrey $2,000.

Kerrey chaired the Bipartisan Commission on Entitlement and Tax Reform, which he got the President to appoint in exchange for supporting Clinton's tax plan in 1993. Pete Peterson was a commission member. The commission couldn't reach consensus, but that didn't matter; its interim report had public relations value. Slickly packaged in glossy yellow with page after page of colorful graphs showing entitlements out of control, the report, issued in 1994, framed the debate. The graphs and charts are now one of the hottest sales tools. Third Millennium reproduced one in a promotional brochure. Sam Beard uses them in his grass-roots campaign. "I go to senior centers and I say, 'I'm going to give you facts out of different government reports,"' he says.

The Bipartisan Commission concentrated on the federal budget. How ordinary people would fare under a reformed Social Security system was off the agenda, says Dr. Jill Quadagno, an eminent scholar at the Pepper Institute at Florida State University, who worked on the commission staff. "When people were brought up, the staff said 'that's not what we're here for."' The staff, Quadagno said, didn't even know what social insurance was.

The Media Buy-In

At a press conference last summer, Tanner pronounced the debate on Social Security over, and opined that the public is fully convinced. Little wonder he believes that, considering how hard Cato has worked the press. Tanner has personally courted some twenty reporters, one at a time, at breakfasts. "The media have been very sympathetic," he says.

For the Concord Coalition, it's the stream of faxes promoting the group's views on Medicare, Social Security and the federal budget that has paid off. Some papers have simply printed the faxes as is, as Op-Eds, Phillips says. Last fall the Baltimore Sun ran one on Medicare practically verbatim. Concord's DebtBusters game shows up on newspaper editorial pages. The editorial board of the Kansas City Star, along with Concord, sponsored a Saturday morning get-together for local high school students to play the game, and invited them to write about it. And there have been innumerable visits to editorial boards. "We like the Washington Post editorials today," says Phillips. "When we first started up, they weren't singing our tune. We sat down and explained why we felt so strongly about the [deficit reduction] program. They have just been reformed on this since then. They are saying entitlements have to be part of the solution. It's like they're reading right out of our playbook."

News columns are reading out of it too. "The media have closed off discussion," says Dean Baker, an economist with the liberal Economic Policy Institute. "They think everyone agrees Social Security is a basket case and has to be overhauled." Baker should know. In a story written last February by New York Times reporter Robert Pear, he was quoted extensively about the virtues of Social Security. The story, complete with Baker's quotes, ran in the Pittsburgh Post-Gazette, but the version appearing in the New York Times had been stripped of all references to Baker and his views.

The Times isn't alone in shading the issue. CBS Evening News recently telegraphed its version of the crisis. "Boomers will need a million dollars if Social Security collapses," intoned correspondent Ray Brady. A few sound bites later he told viewers to "cross your fingers that Social Security will be saved." Money ended a story in its December issue with a quote from a New York Life actuary: "At this point it certainly seems like private savings will be a part of Social Security in the future."

So many anti-Social Security stories were appearing that the A.F.L.-C.I.O., the American Association of Retired Persons (A.A.R.P.) and the National Council of Senior Citizens held their own briefings with journalists. "Some felt that dinosaurs had walked in the door," says Gerald Shea, assistant to the president at the A.F.L.-C.I.O. Shea says he and his colleagues found that journalists have a deep cynicism about Social Security and prefer private accounts because they, too, think they can accumulate a larger nest egg. "What strikes me about these conversations," added Shea, "is that journalists took it personally that they couldn't keep their own money. One guy who wrote the cover story for Time said with real emotion, 'I am really upset for myself and my economy that I can't have all this money to invest."'

Columnists are heavily involved in the sales effort. About a year ago the Washington Post's James Glassman wrote a column pushing the greed argument. In it, Glassman cites a 2 percent rate of return on Social Security funds and a 12 percent rate on stock market investments. The former is a real rate of return, the latter a nominal one. A reader missing Glassman's oblique reference to inflation could be easily misled. Spurred by the need for more accurate and honest reporting in the media, the National Academy of Social Insurance, a nonpartisan group that furthers public understanding of such programs, decided to set up a task force to study how privatization would really affect workers.

Last summer the Washington Post did open its Op-Ed page to Henry Aaron, a Brookings Institution economist who persuasively argued why Social Security was not the basket case the media said it was. The next day, Bob Kerrey attacked Aaron on the floor of the Senate, and his remarks became part of the Congressional Record, preserved to advance further the case for privatization.

Forgotten People, Missing Details

To Vicki Lawson, one of Bob Kerrey's constituents, Social Security is neither an undeserved entitlement nor a dodo bird. She was widowed three and a half years ago at age 47, and almost all of her monthly income derives from Social Security—$2,000 in survivors' benefits for herself and her two disabled adult children, whom she cares for full time, and about $700 from her husband's pension from Goodyear, where he was a mechanic. Her income covers the usual expenses, including medicines for Sandy, her 30-year-old daughter, who has Down syndrome. "In a way," she says, "it's a blessing we get what we do." More accurately, it's the fulfillment of Social Security's compact with Americans. Her Senator doesn't talk much about that.

Georgialee Rodgers, another of Kerrey's constituents, works more than fifty hours a week managing a Gas 'N' Shop on a barren, windswept highway west of Lincoln, far from the glittering ballrooms of the Waldorf and the meeting rooms of State Street Bank. At 51, she is in the vanguard of the baby boomers who are supposed to bankrupt the system. With her $ 17,000 income, she is hardly the vision of Pinera's capitalist. Her front teeth are missing, she hasn't gone to college and has had a hard life raising four children with a part-time husband. She knows nothing about the interlocking organizations conspiring to change Social Security, or about Kerrey's Bipartisan Commission, and she couldn't use the CD-ROM version of the commission report Kerrey keeps in his Lincoln office for constituents who might ask for it.

Rodgers does know she is not a financial wizard. "For me, stocks would be a mistake," she says. The nearly $6,000 in her employer's 401(k) plan is invested in growth and emerging growth stocks. She was told the stocks would only go up. What happens if they go down? "Nobody told me that," she says. Rodgers also knows she needs Social Security. When the numbers are worked, she does better under Social Security than under a private system. No one tells her that either. She hears only that the system is broke. They tell her that on CNN.

The privatizers have pushed such broad concepts, of course, but they've been short on the details, perhaps intentionally. Details don't sell. "My own view is that privatization in the abstract is more attractive than when you look at it with all the details," says M.I.T. economics professor Peter Diamond. Bill Crawford is one of those details. Crawford, a 34-year-old victim of cerebral palsy who lives in Lincoln, struggles to hold a cup of hot chocolate. He receives about $400 a month from Supplemental Security Income, a welfare program administered by Social Security. He's not entitled to Social Security disability benefits because he has yet to accumulate twenty quarters of work history. Sometimes he works at Pizza Hut taking orders; if he answers enough phones, someday he may qualify. That's one of his goals. The disability benefit pays more. "I want to work until I can't work," Crawford says. "I don't think about retirement." Sellers of privatization haven't thought much about people like Crawford. "We're seeing if it's possible to cream money off the top to buy a private disability account," is the best that Cato's Tanner can say.

Although Tanner proclaims victory, there has really been no debate. The opposition got caught "flat-footed," he says, and has been "left behind." If broad public resistance to privatization is to matter in the political war ahead, defenders of Social Security— the unions, the A.A.R.P., public-interest groups—must do more than wish for a stock market crash, the strategy commonly cited right now.

For privatizers, health care reform presents a cautionary tale. Eventually it was torpedoed by slick appeals that frightened people into believing that the medical care they'd come to expect would disappear. Scare tactics to convince the public that Social Security is "broken" could backfire and doom the privatization cause as well. Opposition from the grass roots is bubbling, waiting to erupt. A poll taken by Frank Luntz on Election Night found that people are scared of privatization. "The general notion of privatization has not received a favorable response," says Liz Vandersal, Luntz's assistant. "They are nervous about taking it [Social Security] out of the government and putting it into the private sector." Glenna Chapelle, a disabled worker from Lincoln, puts it this way: "Just start your story out by saying leave Social Security alone. The little people say keep your hands off of it."