Did President Bush Cave On Social Security?

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
May 10, 2005

IN THIS ISSUE:

1.  Chalk One Up For The Democrats & The Press

2.  Bush Caves On The Issue Of  “Means Testing”

3.  Give ‘Em What They Want & They Still Object

4.  Washington Post: No Problem, So Do Nothing

5.  Is Hillary Clinton About To Get In Hot Water?

Introduction

Last week, President Bush began a political process which gives him the option of abandoning his call for private savings accounts as a central point of his push for Social Security reform.  His nationwide push for private accounts has not been met with overwhelming support, and his poll ratings have dropped like a rock recently, thanks to the liberal media.  So once again, he has retreated with proposals that seem to be more attuned to the Democrats’ liking.  The details of Bush’s latest cave-in will follow below.

Some might say that the President has not abandoned private savings accounts, since he still maintains that they must be a part of any reform program.  However, in Bush’s latest news conference, he shifted the emphasis of reform from private accounts to “means testing” (Social Security benefits based on your means – read: income), and I think it was a calculated move by the Administration to begin the process of abandoning private accounts.

The Social Security Reform debate has taken on a life of its own, with everyone from AARP to Alan Greenspan chiming in with their support or opposition.  The rhetoric has ranged from the Pollyannaish view that there is no problem, to Mr. Greenspan’s continued view that there is a real SS problem on the horizon. 

Greenspan is correct, of course.  A Social Security crisis (among others, Medicare for example) is on the horizon.  The only question is when.  Most projections show that Social Security will start to pay out more each year than it takes in around 2017-18 (I think it could happen even sooner). 

Whenever that happens, the government will have to start dipping into the so-called Social Security Trust Fund.  As we all know, the government has been spending the Social Security Trust Fund cash surplus for the last 30 years or longer, and has replaced it with IOUs from the Treasury.  No one knows exactly what will happen when the surplus goes negative and the government has to start cashing in those IOUs, but there is a broad consensus that it will not be pretty.

In this week’s E-Letter, I will revisit the Social Security Reform debate.   I’ll discuss President Bush’s latest version of reform, why he caved on means testing, and the predictable Democratic response – more obstruction.   Lastly, we will look into the upcoming criminal trial of Hillary Clinton’s former campaign finance chairman, and the possibility that Mrs. Clinton could be implicated in this case.

Chalk One Up For The Democrats & The Press

When President Bush began his campaign to privatize a portion of Social Security (SS) for younger Americans early this year, the Democrats and the media went ballistic.  The Democrats resorted to the old Clinton line that privatization is another “risky scheme,” and that Bush really wants to eliminate SS, not fix it.  Private accounts would only benefit the rich. The news media, of course, followed in lockstep.  AARP launched its attack campaign.

Predictably, it did not take long to build a groundswell of opposition to the president’s push to reform SS, even though virtually everyone knows there is a funding crisis on the horizon.  Poll after poll showed private accounts to be unpopular with the public, so what little Congressional support Bush had started to wane.  After all, doing what is best for the country is one thing, but risking re-election is another.  As noted above, Bush’s approval ratings took a dive.

So, in a recent news conference, President Bush presented a Social Security Reform proposal that, for the first time, included the seeds of “means testing” for SS benefits.  By embracing Democrat Robert Pozen’s proposal for “progressive indexing” of SS benefits, President Bush has finally opened the door that would allow benefits for upper income individuals to be different than those with lower earnings.

This may anger some conservative readers, but I believe that President Bush and his advisors are largely to blame for the lack of success on the SS private accounts concept.  His plan was vague and allowed his opponents to freely fill in the blanks with all kinds of horrifying predictions, especially with regard to investing SS private accounts in the stock market.   Even though he has now added a provision that would have private account participants invest in guaranteed Treasury bonds, the damage has already been done.

Bush Caves On The Issue Of  “Means Testing”

The latest addition to the Bush Social Security Reform proposal is known as “progressive indexing” as proposed by Democrat Robert Pozen.  Pozen is chairman of MFS Investment Management of Boston, and served on President Bush’s Commission to Strengthen Social Security in 2001.

In a nutshell, Pozen recommends that low-income workers continue to have their benefits indexed to wages, as is the current practice.  For those with incomes over $113,000, he proposes that they have their benefit increases indexed to prices, which usually produces a lower figure.  Those in between low and high incomes would get a blended approach that would become progressively lower as income rises.

Actually, the idea of changing the way SS benefits are increased is not a new idea.  Other proposals over the years, including some from Alan Greenspan, have suggested that the Social Security Administration change the index upon which benefit increases are based.  These proposals, however, have routinely been denounced for “cutting benefits,” even though everyone knows we will reach a funding crisis at some point.

But the truth is that most of the indexing proposals that have been suggested would NOT have cut SS benefits.  They would have merely slowed the rate of increase in benefits.  Let’s see, if you are still increasing a benefit, albeit by a lower percentage, isn’t it still an increase?  Not in Washington where what is right is measured by the latest public opinion polls, not by common sense or financial acumen!

Actually, the Pozen proposal includes a provision that would allow for private accounts, but only about half of what President Bush originally proposed.  Pozen would allow only up to 2% of workers’ SS contributions to be directed into private accounts that could invest in stocks and bonds.  Interestingly, Pozen argues for such accounts only because they would be a “sweetener” for the high-income individuals whose guaranteed benefits will be lower.

Give ‘Em What They Want & They Still Object

You would think the Democrats would be celebrating the fact that President Bush has bowed to political pressures and has finally included means testing as the pivotal point of his Social Security Reform plan.  But they continue to oppose Bush’s latest plan.  It is surprising that a proposal from a well-known Democrat, which includes means testing, is still opposed by most Congressional Democrats. 

Perhaps it’s because Bush’s latest plan includes a reduction in the increase in benefits for some middle-income workers.  Many Democrats won’t be happy until all middle and lower income workers get a generous annual increase in benefits, and wealthy individuals get nothing, but that’s a topic for another E-Letter.

But the real reason the Democrats still oppose the plan, in my opinion, is because Bush’s latest proposal still contains limited private accounts that are so offensive to the liberals.  The Dems realize they’ve scored a major victory with Bush’s change on means testing, and now they’re holding out to see if they can eliminate the private accounts. 

Another line of thinking is that the Democrats would not support any plan that Bush might put forward.  It was, after all, FDR and the Democrats who created SS, and it darn well has to be the Democrats who fix it.

As it should be clear by now, the Democratic Party should be renamed the “Obstructionist Party.”  From Federal judgeships to Social Security Reform, they simply cannot seem to do anything but throw up obstacles and obstruct.  I have yet to see a detailed plan from Democrats for meaningful SS reform, and even when we get a proposal from one of their own – including means testing- they still can’t get behind it.

Washington Post Says No Social Security Problem

I think an excellent example of liberal obstructionism was evident in a recent Washington Post article on Social Security Reform.  While discussing President Bush’s latest reform proposals, the Post makes the following comment:

“The public ‘understands Social Security is headed for serious financial trouble, and they expect their leaders in Washington to address the problem,’ Bush said. The system, he added, is ‘on the path to bankruptcy’ by 2041. Critics say that claim is misleading.”

But then they go on to say, and this is the really surprising part:

“The Social Security Administration calculates that the system will deplete its reserve of Treasury bonds by 2041, after which it will be able to pay out in benefits only what it receives in taxes. But even then, benefits would be almost three-quarters what is currently promised, and considerably higher in inflation-adjusted terms than they are now. If nothing is done to Social Security, the system will be able to meet the president’s promise to ensure that all seniors receive a benefit larger than current levels.  (Emphasis added – GH.)

So, according to the Post, President Bush is misleading the public about a crisis; yes, the SS “trust fund” will be depleted at some point; but when it is empty, workers will still get almost 75% of their projected guaranteed benefits; and they will be at a higher inflation-adjusted level than what retirees actually receive today.

Let me make sure you understand this.  Let’s say a retiree receives $10,000 a year (just to make the math simple) in SS payments today.  Let’s also say that the benefit in 2041 is projected to rise to $20,000.   The Washington Post estimates that even when the SS trust fund runs out of money in 2041 (or sooner), retirees would still receive around 75% of their projected annual benefit - $15,000 in this example – in a “pay-as-you-go” system.

If you follow this example, the Post is arguing that a benefit of $15,000 in 2041, versus $10,000 today, would be acceptable, and that no SS crisis is ahead.  This is ridiculous!

The liberals are wrong on both points.  Progressive indexing will NOT lead to a cut in actual benefits for most people; benefits will still increase for most people, but not as fast as the liberals want.  And one of the most liberal newspapers in the country is trying to make the case that doing nothing would be OK since workers would still get about 75% of their promised benefits when the trust fund is gone.  This is just plain obstructionism.

It remains to be seen what will happen with Social Security Reform, if anything.  We can argue about whether President Bush should have caved on means testing or not.  But I do not think he should cave on private accounts, which should be an even larger part of his plan in my opinion.  Unfortunately, he can’t go back now.

Whatever happens, or doesn’t happen, with Social Security Reform, the Medicare crisis is going to descend upon us well before the Social Security crisis hits.  As you have probably read, the Medicare crisis is projected to be much larger than Social Security.  I will write about this in an upcoming E-Letter.

Is Hillary About To Get In Hot Water?

In my April 26 E-Letter, I included a link to a story about Hillary’s former campaign finance chairman, David Rosen, being sued by the government for breaking federal campaign law in 2000.  I didn’t write about it in the E-Letter at the time, but the story has since heated up big-time. 

Rosen has been indicted for deliberately reporting that the cost of an August 2000 Hollywood fund-raising gala was only $400,000 when the actual tab was $1.2 million - a step that let Mrs. Clinton spend $800,000 more in “hard money” for her campaign. You may recall that Hillary and her opponent Rick Lazio had agreed to ban soft money, so both camps were scrambling to maximize their hard money.

Rosen is scheduled for his criminal trial later this month.  Until the last few days, Rosen was expected to claim that it was just an honest mistake, and that Hillary knew nothing about it.  But new information has leaked out in recent days which suggests that this trial is going to get national attention at some point, and will no doubt be troubling for Mrs. Clinton.  It could even derail her plans to run for president in 2008.

The story revealed this week is bizarre to say the least.  The New Orleans Times-Picayune has reported on a transcript of a September 4, 2002, audiotape of a dinner conversation between Rosen and Ted Kennedy’s brother in-law Raymond Reggie, who was wearing a wire. Reggie cooperated with the Feds in return for a reduced prison sentence for bank fraud.  [Those Kennedys are a special bunch aren’t they!?]

At the reported dinner, Reggie got Rosen to talk about the Hollywood fundraiser in 2000.  According to the New Orleans Times-Picayune, which quotes from the Fed transcript of the audiotape: Rosen admits that the fundraiser cost more than he reported on the federal campaign forms; he even admitted that the gala could have cost up to $2 million as some of the Feds witnesses apparently allege, which would have meant that Hillary could spend an extra $1.6 million on her campaign.

The New Orleans newspaper goes on to report that in the taped conversation, Rosen told Reggie that he considered himself a “guinea pig” for the Clintons attorneys.  According to the paper, Rosen said: "…the former Clinton White House wanted to hire, or to argue the [Rosen's] case in a certain way… And I did it for them. Like, I bit the bullet and went in as a guinea pig and argued their argument for me. Instead of freeing' and runnin' and coverin' my ass, I was a good soldier… So far it's worked out, but I coulda done it a lot different.”

That was before Rosen was indicted by the government.  Things aren’t working out for him now.  His criminal trial was to begin on May 3 but has reportedly been delayed to later this month.

The issue, of course, is whether Hillary knew about the alleged under-reporting of the cost of the event.  According to the article, the government has two witnesses that organized the event who will testify that Hillary did know what the event cost. 

The New Orleans paper also says that Rosen told Reggie that he spoke regularly during Hillary’s campaign with then-President Bill Clinton regularly - at least once a week - about the campaign fund-raising. This raises the question of what Bill Clinton knew and what he may have told Rosen to do.  Both of the Clintons have a stake in this one.

Previously, it was thought that Rosen would claim it was an honest mistake and hope for acquittal.  Now, however, if this taped conversation between Rosen and Reggie is for real, Rosen may have a different story.

Here’s what columnist, and former Clinton advisor, Dick Morris had to say about it in a recent editorial in the New York Post:

“Did Hillary know? Paul and Tonken [event organizers and witnesses] say she did, and it seems obvious that she must have: Hillary followed every dime in her campaign, personally calling donors for most of it. How could she possibly not have known of a decision that saved her $800,000?
But the person who knows if she knew is David Rosen. If found guilty, he faces a potential sentence of 15 years. If the feds threaten him with jail — and it's hard to see how they wouldn't —Rosen faces a choice: Tell the truth or go to prison.
Rosen is no long-term Clinton loyalist like Webb Hubbell… And there is no Clinton in the White House to pardon him if he goes to prison. David Rosen is a young man in his late 30s, with a life ahead of him. He would be a fool to go to jail to protect Hillary.”

I don’t know how much of the information that has leaked out is accurate.   Likewise, I don’t know if the trial will be widely publicized, but I doubt it.  But we can rest assured that Internet Blogs will follow it closely.

As more information becomes available, it will be interesting to see if a Senate investigation will be called for.  You would think the Republicans would jump on it, since many are worried that no one in the GOP can beat Hillary in 2008.  We’ll have to see.

Whatever happens, I find it more than a little interesting that a member of the Kennedy clan (Ted’s wife’s brother) was used to set up David Rosen and possibly implicate Hillary herself.  Wouldn’t you like to know the real story behind that one!?

In the links below, I have included an editorial from a leading liberal writer who really loves Hillary but asks her not to run for president in 2008.

Very best regards,

Gary D. Halbert

 

SPECIAL ARTICLES

A Personal Lockbox – a good idea for Social Security
http://www.opinionjournal.com/diary/?id=110006667

Hillary In 2008?  A leading liberal says no.
http://www.time.com/time/columnist/klein/article/0,9565,1059000,00.html

Bush, Blair, Howard – An Electoral Trifecta
http://www.weeklystandard.com/Content/Public/Articles/000/000/005/584abfec.asp?pg=2

Where The Media End & You Begin (an interesting read)
http://www.csmonitor.com/2005/0509/p09s01-coop.html


Read Gary’s blog and join the conversation at garydhalbert.com.


Forecasts & Trends E-Letter is published by ProFutures, Inc. Gary D. Halbert is the president and CEO of ProFutures, Inc. and is the editor of this publication. Information contained herein is taken from sources believed to be reliable but cannot be guaranteed as to its accuracy. Opinions and recommendations herein generally reflect the judgement of Gary D. Halbert (or another named author) and may change at any time without written notice. Market opinions contained herein are intended as general observations and are not intended as specific investment advice. Readers are urged to check with their investment counselors before making any investment decisions. This electronic newsletter does not constitute an offer of sale of any securities. Gary D. Halbert, ProFutures, Inc., and its affiliated companies, its officers, directors and/or employees may or may not have investments in markets or programs mentioned herein. Past results are not necessarily indicative of future results. Reprinting for family or friends is allowed with proper credit. However, republishing (written or electronically) in its entirety or through the use of extensive quotes is prohibited without prior written consent.

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