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Today's Commentary: 02.04.05

The Hardest Speech to Witness, Part Two
A Look at the State of the Union

It was a commendable speech. I read every word and was struck by the fine craftsmanship, the subtle nuances and the ever-so-slight slip toward the left. Overall, it was wonderfully written, full of all of the smoke the President is known for distributing.

I did not watch Mr. Bush. I can't. But the State of the Union address is a strange event. The pauses for clapping, an interruption I find far too partisan and a bad way for the American public to find out just how far apart this Congress really is, are incredibly annoying. But that is a purely personal problem.

But nonetheless, the focus of the speech was on Social Security and proved to be another brilliant tactic, thoroughly diverting the attention away from some important behind-the-scenes maneuvering. So, on Monday I'll focus on what the President did not mention.

Have a great Super Bowl Weekend!

Today's Commentary: 02.02.05

The Hardest Speech to Witness
A Look at the State of the Union

I won't be watching as the President gives his state of the union speech tonight. The already overanalyzed speech offers nothing to a growing partisan base of watchers. I prefer to read the text of the speech rather than suffer the President's delivery.

While all of his agendas have serious economic repercussions, commenting on foreign policy has not been one of the focuses of this column. Domestic agendas however have been fair game and this speech will be chock full of readily arguable tidbits as he attempts to change one of the hallmark programs of the New Deal.

Long term readers - and those who purchased my book, "Building Wealth in a Paycheck-to-Paycheck World" (McGraw-Hill) - know that I believe in a means test for the program. This over-simplified solution creates a base benefit at all levels that is gradually reduced based upon asset accumulation. Doing this would eliminate many of the upper income recipients whose ability to fund their retirement was enhanced by their ability to create additional funding for those golden years using investments in 401(k) plans, IRAs and other easily accounted funds tied directly to money. Real estate wealth would be excluded. Even when this type of wealth is sold or reverse mortgaged, the need for shelter would offset many personal gains in monetary wealth. Conservatives would balk at the added progressiveness of the idea, but it would strengthen the program.

The President on the other hand, in his effort to simplify the system, open it to personal accounts, and by doing so, create a program that would depend on the ability of the participants to pick their own investments, creates a more complicated program. If it were simple, the part of the speech that addresses the change would be a mere minute or two.

The system is incredibly simple as it stands right now. Taxes are taken from both the corporation and the employee and put away in a rainy day fund. I know, the first argument you as a reader might have is the fact that the program is a pay-as-you-go institution. But the program does have surpluses which have been systematically removed, replaced with the promise of repayment, and used to fund other Congressional projects. Those IOUs have a value and should that money ever be replaced, the program would be solvent well beyond current doomsday estimates of 2042.

I refer to it as a rainy day fund largely because this nation already has over $14 trillion at work in the equity markets. Taking another $1.4 trillion and investing in stocks would, in effect, assume that diversification is not a good investment strategy. The current obligations are backed by Treasury notes with a conservative yield.

I don't believe the argument for personal accounts holds much hope of returns the President will argue are available for the average investor. That investor has not proved as savvy as Mr. Bush would like to believe.

The history of self directed accounts is littered with winners and losers. The winners, diversified their holdings at a time when such investment techniques were unpopular while the losers, many of whom could see a rich retirement ahead of them as we entered this century, followed the crowd to the next hot fund or equity, and are begrudgingly continuing to work.

The administration will use several tactics to sell their agenda including the advantages such changes would have for the black constituency. The Chief Actuary for Social Security took umbrage with the potential retirement comparison between white and non-white retirees suggesting that research does not show a disparity in the quality of retirement enjoyed by either group. In fact, he found that blacks may actually enjoy a better expected rate of return.

What the President will attempt to cite is their diminished life span compared to whites and how wonderful it would be if they could leave their accumulated benefits to their heirs. But this would also be fishing for facts that don't really have much of an impact on benefits. Black workers do live shorter lives and tend to work at lower paying jobs but the progressiveness of the program rewards them with higher benefits in retirement.

Blacks should understand better than most groups how and why they have shorter life expectancies. Pushing the President to justify his belief that cutting disability benefits as the program is changed, a benefit that is currently the life blood of many African-American families and not adequately addressing the lack of health benefits available to the same group, would more be beneficial to this group of workers.

There will also be the issue of fees, much discounted by pro-reform groups as minimal in comparison to the rewards offered by the privatization of the program. During the campaign, the Kerry camp suggested that fees could run as high as 0.8%, effectively siphoning off as much as $940 billion in potential returns for these investors. Conservative based groups such as the Institute for Policy Innovation and the ultra conservative Club for Growth quickly discounted those figures and the revised figures offered by the Chief Actuary for Social Security. The agency's lead accountant put the cost of managing private accounts at .25%.

Offering the opinion backed by the research of Wall Street management firms, these groups suggested that the actual cost of running privatized accounts would be closer to 0.1%. Using the fees charged to the Federal Employees Thrift savings as an example, you will be asked to assume that any fee at all is better than a system that currently charges no fees while offering a guaranteed return.

The estimated yield on those investments requires you make some strong assumptions as well, which if they are true would make those account fees, even at small percentages, a windfall that no fund manager would ignore.

It is important to understand that the return offered in the stock market are based on three things. The assumed rate of return in the stock market is possible but dependent on continued growth of company's stock prices in all environments, the sustained ability of companies to have capital gains and pay dividends - these two as a stand alone figure account for half of the 6.5% figure - and the strength of those managing those accounts to beat not only inflation but to stay ahead of break even.

Bright side, glass-half-full economist all point to unprecedented growth in equities over the next seventy five years, a feat that has not been accomplished in the previous seventy five years. Discounting the fifty or so years of relatively minor change in the major indexes, the brightsiders see nothing but blue skies and green lights. Long term investors know that there are periods of growth that will not be great and often outnumber periods of good growth.

But as economist Paul Krugman pointed out in a recent column in the New York Times, the kind of growth that these groups suggest would happen in the economy to provide those returns, would also be windfall for the government in taxes collected.

So why change what is bound to improve with time under the scenario of such marked economic improvement? And why spend to fix what will clearly be righted by the very market forces in the next seventy five years based on the administration's own numbers? Hard to say. But tomorrow, as I mine the speech for nuances of truth without having to watch the painful oratorical style of the President speaking to a growing partisan crowd, I will be hopeful that the American people, both conservative and liberal, Republican and Democrat, refute this effort to change what clearly doesn't need fixing.

The Blue Money Report
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