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Stocks' Slide Undermines Support for Social Security Privatization

By: Greg Hitt
New York Times, July 23, 2002

WASHINGTON -- In the nation's capital, one of the major casualties of the precipitous decline in the stock market is President Bush's move to overhaul of Social Security.

When stock prices were still soaring in 2000, Mr. Bush campaigned for the presidency on the idea of allowing workers to invest a portion of their payroll taxes in stocks. And late last year, a Bush-appointed presidential commission recommended three plans for making that happen and called for a yearlong national debate about the issue.

Those ideas have lost a lot of their appeal for voters, who increasingly see the market as a risky bet -- and not a place to gamble their Social Security nest eggs.

In a Wall Street Journal/NBC poll, 55% of Americans said they would oppose partial privatization of Social Security, compared with 41% who support the idea. That is a marked shift from even last December, when respondents essentially split on the issue, with 48% opposed and 46% in favor of privatization, and a sharp drop from April 1998 when Americans said they favored the idea by 52% to 41%.

  And a report by the Center for Economic and Policy Research, a liberal think tank, contends as of June 30, workers would have suffered losses of $31 billion if as little as 2% of Social Security's finances had been carved out for individual investment accounts since 1998.

  White House officials say Mr. Bush remains committed to the initiative and will continue to press it. But with markets falling along with public enthusiasm for the idea, the issue is a difficult one for Republican candidates going into the 2002 congressional campaign.

And the panel's call for a national debate could postpone legislation even longer than a year -- perhaps beyond the next presidential campaign, if markets remain in a slump. "With the stock-market meltdown, it's clearly a second-term agenda item, at the earliest," says GOP consultant Scott Reed.

  Championing major change for Social Security was one of the biggest risks Mr. Bush took during the 2000 campaign season. Democrats -- the Depression-era program's long-time defenders -- typically benefit most when the political debate turns on the issue. But by pressing the idea of privatization, Mr. Bush managed to neutralize the issue in 2000.

Meanwhile, the fundamental concerns about Social Security's financial health haven't gone away and are likely to grow if the country's economic troubles mount. The program is projected to start running a deficit within 20 years. And advocates of change long have argued that letting people divert some of their contributions to private-investment accounts would put the system on more solid footing.

  When it called for a one-year national debate on the issue, Mr. Bush's special commission essentially set the stage for legislative action in 2003. White House spokeswoman Claire Buchan says the president still wants a "national discussion" and she says the market -- despite the recent volatility -- has a much greater long-term rate of return than Social Security's 2% average.

"The president believes it is very important to reform Social Security, and that reform should create an opportunity for ownership," she says. Yet during a stop at an Illinois factory on Monday, Mr. Bush suggested he is skeptical of placing too much trust in Wall Street. (See related article⁵.)

Increasingly, top administration officials talk privately of a Social Security overhaul as a second-term priority. Others in the political establishment are growing more open about the likelihood of delay, too.

David Walker, head of the General Accounting Office, the official congressional-watchdog agency, says it is "highly unlikely to get comprehensive social security reform by 2005." Even that is an early estimate, he says. Iowa Sen. Charles Grassley, the top-ranking Republican on the Senate Finance Committee, says Republicans shouldn't even think of taking up the matter unless they win control of both houses of Congress this fall and have a clear mandate from voters.

Not every privatization advocate is running from the fight. The Cato Institute, a free-market think tank, is releasing its own poll result Tuesday, showing a majority of Americans still support privatization. Conducted in early July amid sharp market declines, the poll shows the issue of "controlling their retirement future ... trumps any short-term market volatility" for voters, says Richard Pollock, Cato's vice president for communications. 

But that is clearly a minority view in Washington political circles these days. More typical is Florida GOP Rep. Mark Foley, who says the market declines have frightened voters about the idea of privatization. Mr. Foley, who sits on the House Ways and Means Committee, the starting point on Capitol Hill for all Social Security legislation, adds: "This is just not the time to have a thoughtful debate. People will throw up the red flag."

Mr. Foley says he expects discussion on the issue will gain steam again, as the market begins to rebound. "But after the last 14 trading days, if you tried to have this conversation with Warren Buffett, I don't think [even] he'd be interested." 

For opponents, there is a bit of "I told you so" in the latest market slide. Critics long have charged the Bush initiative would drain too much money from the troubled program and expose taxpayers' retirement nest eggs to too much risk.

"Things tend to be vindicating what we have been saying," says South Carolina Rep. John Spratt, a Democrat who long has warned of the perils of privatization. "What we're seeing has got to be a sobering development for people who have advocated private accounts as part of Social Security."

Few other nations have gone the route of privatization. In Chile, which privatized its social security two decades ago, enthusiasm remains high. The reform has boosted the country's savings rate. With close government regulation of how the money is invested, the pension funds posted positive returns -- between 2.6% and 4.5% -- for the first six months of this year, despite the global stock rout. 

Going into the 2002 campaign, Democrats generally have argued trying to balance the budget again is a better way of addressing Social Security solvency problems than creating private accounts. But to take advantage of the public's election-year angst, party leaders also are attempting -- through a so-called discharge petition -- to force a floor debate in the House on privatization. "The dial has been turned up," says Jenny Backus, spokeswoman for the Democratic Congressional Campaign Committee.

-- Matt Moffett contributed to this article.

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