Topeka Capital Journal, November 19, 2004
Minuteman Media, November 17, 2004
Gates County Index (NC), December 1, 2004
Eastern Wake News (NC), December 2, 2004
Roanoke-Chowan (NC), November 30, 2004
High Point Enterprise (NC), December 4, 2004
Immediately after his re-election, President Bush announced that privatizing Social Security would be at the top of his second term agenda. While we don’t know his exact proposal yet, the basic plan from his Social Security commission called for cutting benefits, but allowing workers the option to offset some of the cuts by investing a portion of their Social Security taxes in the stock market. Ironically, this plan is likely to be especially harsh towards the conservative Christians whose votes were so crucial for Mr. Bush’s re-election.
The problem is simple. The president’s plan would allow workers to invest in the stock market only by purchasing broad market indexes, like the S&P 500, which includes 500 of the country’s largest corporations, or even broader indexes that try to encompass the whole stock market. Workers are required to invest in indexes, rather than individual stocks, to ensure they do not take excessive risks with their core retirement income.
Any individual stock, or group of stocks, can fall on hard times, as examples like Enron, WorldCom, or United have shown. But a broad index of stocks will only turn down if the whole stock market goes down. While market plunges do happen (the last crash was only four years ago), an index of stocks is a much less risky investment than a single stock or small group of stocks.
However, the problem with an index fund is that it includes companies that profit on investments that some may view as immoral. For example, a broad index fund would include companies that profit from selling weapons to repressive dictators. It would also include companies that adopt anti-labor policies in the United States and even violate U.S. labor laws. A broad index fund would also include companies that sell pornography, conduct stem cell research, and perform abortions.
The latter three sources of profit are likely to be highly objectionable to many of the conservative Christians that supported President Bush’s re-election. Presumably, many of these people would opt not to invest in the stock market, rather than share in the profits from such activities.
Of course, it would be possible to design funds that have screens on certain investments. But, if funds were designed with screens that met the concerns of one group, then presumably it would also be necessary to create funds with screens for issues that concern other segments of the population, like support of repressive regimes, and bad labor and environmental practices.
The creation of such funds would make the program considerably more complex and most importantly would raise the administrative cost. President Bush’s commission estimated that administrative costs would consume 5 cents of every dollar placed in the index funds, assuming a single fund. If there are many different funds, with complex screening rules, the fees could rise to 10 cents or even 15 cents, levels that will prevent workers from recovering any substantial portion of their benefit cuts. This is the reason that the President’s Social Security commission ruled out such funds.
And the proposed cuts would be large, especially for those who choose not to invest in stocks. Under the most widely cited proposal, the cuts would be phased in, so that younger workers would see larger cuts. For example, a worker who is 50 today would see a cut of about 7 percent in the benefits they are scheduled to receive, whereas a worker who is 30 today and will turn 65 in 2039 would see a cut of approximately 25 percent in their benefit. Younger workers, and those yet to enter the labor force, would see even larger cuts.
Of course the stock market is not a money tree – even workers who do invest in the market will only be able to recover a small portion of these cuts. But many workers will find it morally unacceptable to invest under the terms that President Bush’s plan presents them. For these workers, the proposal is therefore necessarily a benefit cut. It is ironic that President Bush has taken his election victory as a mandate to single out conservative Christians – specifically those who want their investments to be consistent with their moral views – for cuts in their Social Security benefits.