http://www.businessweek.com/magazine/co ... _mz001.htmMAY 16, 2005
"I Want My Safety Net"
Why so many Americans aren't buying into Bush's Ownership Society
George Silli, a 66-year-old waiter from suburban Philadelphia, had a brush with President Bush's Ownership Society, and it was an experience he'll not soon forget. Silli's psyche and his wallet still bear the scorch marks of the 2000 market meltdown. He saw the value of his mutual funds drop by 60% and is convinced that opening Social Security to individual investing would produce similar results on a massive scale. ``If people are left to their own devices, we'll become top-heavy with poor people,'' Silli says.
A political independent, Silli has learned enough about the market to be pessimistic about a small fry's chances. He not only wants to leave Social Security alone but also thinks politicians should expand entitlements by mandating near-universal health insurance as a shield against soaring medical bills.
Although Silli may not know it, he has plenty of company from all walks of American life. He's part of a diverse group that includes the pathologically risk-averse and those who are willing to take the Ownership Society for a spin -- as long as it's equipped with air bags.
April Tsirigotis, a 30-year-old Republican and an information technology executive from Lusby, Md., is a big fan of the President and applauds his efforts to solve Social Security's fiscal woes. But, says Tsirigotis, the divorced mother of a 7-year-old, ``I disagree with the idea of giving people private accounts in which their annual returns and their eventual benefits would be based on the stock market. It's too risky. No one knows how much will be there in the end.''
While many members of Safety Net Nation have nothing against investing and choice, they're worried that the country's web of public and private social protections is fraying. They believe in more, not fewer, safeguards against downward mobility in a world that's already pulsing with economic uncertainty. Safety Netters include plenty of card-carrying Republicans and independent swing voters, and the group may represent a broader swath of America than the White House imagines.
A Sept. 2-5, 2004, survey by the Civil Society Institute, a Newton Centre (Mass.) nonprofit group, found 67% of Americans think it's a good idea to guarantee health care for all U.S. citizens, as Canada and Britain do, with just 27% dissenting. Support for a government-directed universal insurance system is strong, despite GOP warnings about socialized medicine. Similarly, a Feb. 3-5 Washington Post/Kaiser Family Foundation poll found that 47% of respondents believe the government ought to guarantee a minimum standard of living for retirees, vs. 35% who felt that was an individual's responsibility.
The most predictable members of Safety Net Nation are liberals who favor activist government. The really crucial bloc, however, is made up of those who backed Bush in 2004. They still approve of his overall job performance but have soured on Wall Street and dislike the President's approach to Social Security. This faction -- estimates range from 17% to 22% of the electorate -- rejects both traditional liberalism and conservative laissez-faire. In an era of rampant job insecurity, when employer-provided pensions and health coverage can no longer be taken for granted, they want a middle-class security blanket that gives them protection as they build wealth.
Stretched Thin
Safety netters' fear of social unraveling comes amid some disquieting trends. Big swings in family income, according to studies by Yale University political scientist Jacob S. Hacker, have increased markedly over the past two decades as the finances of two-earner households have been stretched thin. Even houses -- most Americans' entrée to the Ownership Society -- are increasingly in hock: In the past 15 years, mortgage and home-equity borrowing has risen from 35.1% of home values to 43.9%. That has made families, especially those with unskilled workers, more vulnerable to a catastrophic jolt such as job loss or serious illness. Personal bankruptcies increased fivefold from 1980 to 2002, with many filers citing a layoff or medical emergency as the tipping point.
As income volatility has grown, government -- prodded by free-market Republicans out to reverse the New Deal -- has been offloading ever more responsibility onto individuals. The financial pressure has become much more acute because of another squeeze occurring in the private sector. Corporations vying to compete globally have steadily shifted costs and responsibility for pensions and health care to their employees as part of the restructuring wave that began in the 1970s.
The Sellathon That Didn't
Conservatives see disentitlement as a recognition of new economic realities -- and the death rattle of the Nanny State. But skeptics, among them prominent New Democratic thinkers, counter that America's safety net can be both modern and market-based without piling still more financial burdens onto the stooped shoulders of Joe and Jane Average.
Because social engineering through tax breaks, preferential loan and savings plans, and other indirect subsidies favors those with good jobs and income to invest, New Democrats advocate policies that tilt savings incentives toward lower-income Americans. They include universal 401(k)s, compulsory savings plans set up for kids, and mandated social insurance -- a subsidized rainy-day fund for financial emergencies. Hacker is working on ``a kind of catastrophic insurance plan that could be administered by the private sector but heavily regulated by the government.'' Employers would be required to match employee contributions to the new financial umbrella. The price tag, he concedes, ``would not be trivial'' -- meaning a multibillion-dollar commitment.
Conservatives dismiss such proposals as security pie-in-the-sky. But they've got their own problems in the here and now trying to generate momentum for personal accounts and other becalmed elements of the Bush ownership initiative.
The centerpiece is an audacious bid to ``modernize'' the government's retirement system by letting workers divert part of their payroll taxes into stocks and bonds. On the road, Bush tells audiences he's selling a retirement iPod -- sleek, shiny, and designed for the Digital Age -- while Democrats cling to a system as retro as an LP record. Besides, he says, the downside of personal accounts will be limited. Those who opt in will have a carefully chosen range of investment options, selections modeled on conservative fund choices found on 401(k) menus.
Trouble is, the President, in his guise as Salesman-in-Chief, may have done too good a job raising alarms about Social Security's imminent implosion. ``Bush said, 'We're going to have a crisis,' and offered private accounts as part of the solution,'' says James K. Glassman, an American Enterprise Institute scholar. ``But the two things are really separate, and the President was never able to make a connection between them.'' What's more, the crisis-mongering only served to heighten anxiety among the risk-averse cohort.
Bush made an overture to critics on Apr. 28 when he offered to protect payouts for the poor. His idea: preserve the current benefit structure for the bottom third of wage earners while progressively reducing guaranteed payments for those up the income scale. The result is a means-tested version of Social Security. But despite such gambits, the President has little to show for a 60-day national sellathon that took him to 23 states. If Congress enacts Social Security reform this year, it could be a far cry from reformers' dreams of big private accounts carved out of payroll taxes. ``Bush will come out of this with something, some change or other that allows him to say he moved the ball,'' predicts pollster John Zogby. ``But it won't be what he wanted.''
Down on Wall Street
Objectively, this is not a bad time to be raising the issue of reform. Baby boomers are about to retire en masse and on paper, family balance sheets have improved. Americans' household wealth has floated upward of late, propelled by recovering stock valuations and soaring real estate values. Moreover, real wages for the civilian workforce have grown 8% in the past decade after a long stretch when they fell. And the family poverty rate, tallied at 10% in 2003, has improved from the 13.9% numbers recorded four decades earlier.
Still, what private-account backers seem to have misjudged is the public's current jaundiced view of Wall Street and investing risk. America, unlike most other advanced nations, has a dual welfare system. There are direct government-transfer payments to the poor and elderly -- programs such as Medicare, Medicaid, food stamps, and Temporary Assistance for Needy Families. But there is also a huge set of private-sector protections for workers, largely underwritten by employers -- items such as subsidized life insurance, disability coverage, and help with day care. Plus, powerful groups in society snare subsidies in the form of preferential loans offered to farmers, disaster relief, tax-deductible flood insurance for beachfront property owners, and a fistful of tax breaks for small businesspeople.
While federal spending on the safety net for the poor has grown briskly, it hasn't kept pace with society's needs. Medicare is straining to cover seniors' bills, and some states are downsizing Medicaid programs. In 1996, strict time limits were put on welfare dependency, a step that slashed the rolls by half. Meantime, huge holes have been ripped in the private safety net as the cost shift to workers has accelerated.
The result is riskophobia. ``With a far greater portion of family budgets devoted to the mortgage, car payment, and health insurance, a transitory shock to wages becomes much more menacing,'' says Raj Chetty, a University of California at Berkeley economics professor who studies risk. ``Equities are seen as risky, and if people aren't jumping for the investment option [as part of Social Security reform], there's a reason. Risk in general has become a much more pervasive issue.''
In January, 2000, before the dot-com bubble burst, 67% of Americans said that if they had $1,000 to spare, investing it in stock would be a good idea, according to the Gallup Poll. By April, 2005, that percentage had fallen to 45%, with 51% saying the stock market would be a bad choice. Among the groups whose faith in the market dipped most are three key Bush constituencies: baby boomers, college grads, and suburbanites.
Chasing Gushers
To George W. Bush, a Texan who revels in the myth of the wildcatter, running risks in pursuit of the big gusher is a quintessential part of the American character. But as the scion of an aristocratic Eastern dynasty, the budding young tycoon always had a network of family friends and relations to call on. Those golden connections bailed George W. out of his early forays into the oil business.
The not-as-well-fixed Net Setters want some bedrock guarantees in turbulent times, too. Private Social Security accounts? Sure, in addition to core benefits. Portable medical savings accounts? Fine, but not as a replacement for employer-provided health insurance. ``They want the Ownership Society -- but they want it with a warranty,'' says Representative Rahm Emanuel (D-Ill.), who has introduced legislation to expand tax credits for lower-tier families and to make college savings easier.
According to a BusinessWeek analysis of data compiled by the Pew Research Center for the People & the Press, at the core of Safety Net Nation are white men. You read that right. These are the same white-male swing voters who have been trending strongly Republican in recent Presidential contests. They tend to be socially conservative and patriotic. They have average incomes and are slightly less educated than the citizenry as a whole.
The Safety Netters are not monolithic, however. They include aging men who are suspicious of Big Government and Big Business and who view private accounts as a giveaway to Wall Street and a gamble for their children and grandchildren. There are suburban Security Moms -- convinced by Bush that Uncle Sam should aggressively protect them from terrorists and cultural pollution -- who worry that the President is making retirement dicier. And there are the burned investors of the Baby Boom generation, who want some government safeguards from the serrated edge of globalism -- from corporate downsizing to vaporware pensions and rampant outsourcing.
Bush über-strategist Karl Rove, who commands the White House's Social Security war room, sees personal accounts as vital to shifting the allegiance of younger voters to the GOP. But there's a glitch in Rove's machine: Polls show that, rather than flocking to Bush over Social Security, the under-40s are growing skeptical of his approach.
Among those resisting a Bush move to pare middle-class entitlements are thirtysomethings who feel squeezed between saving for their kids' college education and taking care of retired or soon-to-retire parents. Then there are disillusioned techies who once wanted government to get out of the way and let them get rich by age 30 but who now favor a federal role in shielding them from the excesses of capitalism.
Put these pieces of the electorate together, and you have the makings of a political boulder that stands between Bush and his shining city on Ownership Hill. ``We are now living in the Security Society,'' says independent pollster Thomas H. Riehle. ``People say, 'Protect me.'''
If the President can't win over some of these skeptics, GOP knees will continue to buckle on Capitol Hill. More important, other elements of his agenda, from new savings plans to personal health-care accounts, could be imperiled by the flight to safety. ``If Social Security reform stalls, blood will be in the water,'' warns Daniel J. Mitchell, a senior fellow at the conservative Heritage Foundation. ``Democrats fighting for what I prefer to call the Dependency Society will be emboldened to oppose all of Bush's ownership agenda.''
To complicate the President's push for private accounts, the performance of stocks in what was supposed to be a sprightly spring has led to more skepticism. In April, the Dow Jones industrial average hit a new low for the year on stagflation worries, and the major indexes gave up most of their '05 gains as investors fled from risk.
``Bush's timing is not good,'' notes Eva Bertram, a political scientist at the University of California at Santa Cruz. ``The public is leery of becoming more dependent on the market, and there is great anxiety over employment prospects and stagnant incomes. Right now it's just very hard to give up the security offered by things like Social Security and traditional Medicare.''
Shifting the Risk
Democratic pollster Stanley B. Greenberg is more blunt. ``I never believed this Investor Class hype for a minute,'' he says. ``What happened is that Bush gave the nation an extended tutorial on risk, and that came on top of growing awareness of the risk shift from private institutions to individuals'' as both traditional pensions and 401(k)s fell short of offering true security. The result, Greenberg's data show, ``is a collapse in support for Social Security reform.''
What the White House proposes, in fairness, is not a complete swap of a public retirement supplement for a private one. Bush says that letting workers voluntarily set aside a chunk of their payroll taxes -- say, 4 points of the 12.4% tax -- in conservative investment options will let retirees reap a richer reward than the government system's puny 2% return. But if guaranteed benefits are slashed for the middle class and above, more Americans will be drawn into private accounts to make up the difference, changing the nature of Social Security. ``The plan does have a guarantee in it in the form of the core benefit,'' says Kent Smetters, a Wharton School associate professor and former Bush Treasury official. ``Since it's only partial privatization, Bush needs to play up the safety net angle.''
The model for private accounts is the 401(k) system of workplace savings. But critics claim Bush is overselling the ability of such self-directed plans to build a nest egg. Former Clinton economist Alicia H. Munnell, director of Boston College's Center for Retirement Research and an expert on 401(k)s, says the numbers don't bode well for Social Security.
Skimpy Savings
Munnell's research shows that 26% of eligible people never opt in to 401(k)s, fewer than half of the participants take the advice of financial planners and diversify their holdings between stocks and bonds, and 55% cash out their savings when they change jobs -- which is frequently. Models project that a median-wage worker contributing 6% of pay, plus a 3% employer match, should have about $300,000 in his 401(k) as he approaches retirement. The actual figure: $42,000.
``People have not done a very good job with 401(k)s, and it weighs on them,'' Munnell says. ``I don't see any sign that they're dying to take on still more of this kind of responsibility. The Social Security debate may be testing the limit of the swing to individualism we have seen for the last 20 to 30 years.''
To the counter-reformers who believe Bush is misguided in his ownership strategy, the question is not whether to kill off market-based measures that aim to increase family savings or health-care security. It's how to use markets and choice in a more effective way.
Democrats would keep core Social Security intact but are willing to augment it with an add-on investment option. ``If the President says individual accounts would be separate from Social Security and was willing to make the financing of reform progressive, he could get Democrats to sit down, and [he would] have a shot,'' says Gene Sperling of the Center for American Progress, a Democratic think tank. ``If he wants to start down the slippery slope toward privatization, why should we work toward goals that are the antithesis of what Democrats believe in?''
Other Dems are more forgiving. ``The President has the right idea to strive and make more people own more of America,'' says Ray Boshara, director of the asset-building program at the New America Foundation (NAF), a centrist think tank. ``Owners are better citizens. But we need to preserve the safety net while helping people build wealth.''
The NAF is pushing two pet ideas: a tax-favored savings account for every child, seeded with a $500 grant at birth and with government subsidies for low-income kids, and an option for taxpayers to direct the IRS to channel part of their tax refunds into savings accounts. If savings can be made automatic, backers claim, taxpayers are less likely to spend refunds.
An Elemental Struggle
The ``kid-save'' idea is no pipe dream. An early fan was former Bush Treasury Secretary Paul H. O'Neill, and conservatives such as Senator Rick Santorum (R-Pa.) are mulling legislation to create the accounts. Projected cost over 10 years: $38 billion.
Yale political scientist Hacker and economist Peter R. Orszag of the Brookings Institution are thinking on a larger scale. Hacker's plan for a universal family savings account is being fleshed out and is scheduled to be unveiled in August. ``You have to provide workers with a basic form of protection that follows them from job to job and covers big risks,'' Hacker says. Universal insurance would be regulated by the government, and employers would have to kick in mandated matching payments. But administration of accounts would be left to the private sector.
Not so long ago, Republican economists would have been delighted to hear political rivals floating ideas for boosting savings and shoring up Social Security's solvency. But in today's hyper-partisan climate, the fight over the ownership agenda has taken on a larger dimension. Bush wants to wind down dependence on the bureaucratic welfare state. Democrats want to revalidate government by weaving costly new safety nets for workers. It's an elemental struggle, but one in which outcomes can be perverse.
In 2003, for instance, the White House set out to revamp Medicare by putting a lid on runaway costs of the huge entitlement program for seniors. GOP lawmakers, though, feared they would be hammered over the issue in the '04 election, so tough cost controls went out the window. What Bush wound up signing into law still has many conservatives seething: a $1.3 trillion expansion of entitlements in the form of a new Medicare prescription-drug benefit. It was hardly the monument he envisioned. But it was a testament to the raw power of Safety Net Nation, which -- for now -- seems to be just saying no to more financial risk.
By Lee Walczak and Richard S. Dunham, with Mike McNamee in Washington and Ann Therese Palmer in Chicago
