Tuesday, March 01, 2005

Save Social Security -- silence Bush

On February 2nd, Bush 43 spoke from the 104 page GOP game book for the promotion of Social Security privatization. AARP has come out against privatization; and Alan Greenspan has given a vague and qualified nod in favor of it.

Let’s accept Bush’s own words as the standard for judging his plan:

"Social Security was a great moral success of the 20th century, and we must honor its great purposes in this new century. The system, however, on its current path, is headed toward bankruptcy. And so we must join together to strengthen and save Social Security."

Some will recall Bill Clinton’s “what the meaning of is, is” line during the impeachment attempt. Now we have an issue of what the meaning of “bankruptcy” is. Social Security, as a government program, cannot go bankrupt. However, it can outspend a “pay-as-you-go” system; for that reason a “trust fund” was created and routine annual actuarial adjustments were introduced under Clinton.

GOP opposition limited the scope of those adjustments to something slightly less than the realities of modern medical advancements – we’re living longer than they allowed for.

To compensate, we can expect to see restrictions on government funded preventative medical care – the result will be longevity advances in Europe and Asia filtering into this country, rather than originating here. Basically, instead of changing the actuarial tables, the practice has been to negatively affect the demographics and domestic medical economics.

The problem with privatization starts when we match assumptions with historic performance. For the past 75 years, economic growth has averaged 3.4 percent. Bush has Social Security actuaries projecting an economic growth averaging only 1.9 percent over the next 75 years. So the premise is that of a nation in economic trouble – growth equating to that between the two World Wars.

If we exclude the eight years under Clinton, the equities markets have never matched inflation for more than one year. The Bush privatization plan calls for sustained growth 3 percent above the rate of inflation. Had that any historic basis – including the disinflation of the Great Depression – since 1928, the Dow would have passed 22,000 by 2002; which is to say it would currently be twice its historic high, and more than twice where it currently is.

It has already been established that the “ownership” applies only to the amount left after the purchase of an annuity policy sufficient to provide the beneficiary with a lifetime income. The funds paid would be forfeit in the same way current social security withholdings are forfeited on the beneficiaries death.

However, there is a significant difference. Under the current system, your spouse, or minor children, receive benefits based on your contributions – under privatization the amount applied to the annuity would be lost to them. But let’s return to the keystone of the Bush equity market based proposal – the promise of wealth.

The Dow registered 386 in 1929 (Sept), this was followed by the 1929 crash, and that high was
not surpassed for a generation – until 1954 (Nov) and the Korean Armistice. During that period bonds outperformed equities; but, during successive GOP rule, equities traded erratically in a 90 percent range (40 to 391).

The Dow then made a steady climb, first breaking 1000 during the Kennedy Administration, 1966 (Jan) – bonds held steady, while equities moved steadily upward. However, Dow didn’t close above the 1000 mark until Carter ran for office – he inherited a Nixon/Ford economy that was a disaster and marked by structural unemployment. Under Carter, the bonds outperformed equities with equities in a narrow 29 percent trading range.

Reagan came into office and the bond yields – which exceeded 15 percent by 1981 (Sept) – continued their upward climb. Under Reagan equities posted a loss, deficits soared, and Iran-Contra made news. As bond yields peak, the 5 year return on our equities model is only $3.89 – not enough fo a Big Mac and fries – while treasuries returned $1,207. But, in 7 years, the Dow does break 2000. In 1989 (Jan), Reagan gave Bush 41 record deficits, 9 percent treasury yields, and a equities model yield of $11,099.

I would note here that the son, Bush 43, is the only President to post a negative equities return in his first four years. Conversely, Clinton had a larger return per thousand dollars invested than the sum of all of the preceding three presidents – largest percentage increase for any eight year period in Dow history.

The most telling truth is that our current president accomplished something which could only be seen in the four years between 1928 and 1932 – an equities market loss.

As Bush has also said, "The principle here is clear, taxpayer dollars must be spent wisely, or not at all." It would seem that Bush has never heard one of the oldest lines in the equities industry – “If you want to make a small fortune in the stock market, start with a big one.”

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