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To the Last Dime 

by Robert Herold

Four years ago, our teenage son Timothy found himself in possession of some loose change, about $1,500 worth. He decided to become a capitalist. I suppose you could say that he joined "the ownership society." After studying up on the performance of several stocks, he decided on a diversified portfolio. Most of his money went into Apple stock, the rest into Conoco. He had become a 14-year-old tycoon, and was he ever excited.

Then the tech bubble burst, after which came 9/11, followed by more market malaise: Before he knew it, his "ownership" in society had dropped to about half of what he originally had.

Now, thoroughly discouraged, his interest in the market waned. He showed no interest in reading his statements, each one less encouraging than the one before. Down, down, down went his investments.

It didn't help that about this time the Enron scandal broke. George Bush was in bed with Enron, whose leader, Ken Lay, was a crook. Meanwhile, the president worked hard to give tax breaks to all his other friends in Lay's tax bracket. Suddenly the system seemed rigged to actually take all his money, not grow it. He lost all faith in capitalism.

It was at about this time that he began reading Karl Marx. He even ordered a T-shirt with Lenin's picture on it. Images of Ch & eacute; Guevara filled our computer screen.

In the meantime, though, his investment had quietly begun to make a comeback. You might sense his astonishment when just the other day he finally took the time to read his statement. His original $1,500 (which, at one point, had dropped to half that amount) was worth $2,100, thanks primarily to Steve Jobs and his iPod. And Conoco wasn't doing badly either -- something about gas prices going up.

It's this kind of personal financial success that President Bush and his supporters are promising to our younger workers -- a key to the gates of the ownership society. Timothy could be their poster child, if only he hadn't (temporarily we assume) become a Marxist. You would never see this kind of return on the old, safe, government-run pension. And with the possibility of millions of new investors, the brokerage houses and mutual fund managers are hitting the airwaves and cyberspace with all those charts that show how Timothy's experience is just there waiting for all: "Our five-year growth is (fill in the blank) percent." (Whatever the number, it's a whole lot better than the piddling amount that government securities investments now bring.)

But what is this really all about? It's hard to tell by listening to the president; his rhetoric seems to shift from day to day. In one speech, the system is all but broke. In another, the real point of the reform is creating "an ownership society." So we are led from rescue-mission to opportunity and back again.

I'm certainly no expert on all this, but about the rescue mission, I do have a "gut feeling" (to use the president's phrase) that by making the system even mildly more progressive, most of the projected shortfalls can be met. Even Republican Sen. Lindsey Graham, an architect of the privatization plan, demands that we raise the payroll tax ceiling. (At present, only the first $88,000 of an individual's annual employment earnings are subject to the 12.4 percent payroll tax, which supports Social Security.) AARP believes that by raising the ceiling to $140,000, we would fix upwards of half the problem. As for the other half of the problem -- well, doesn't it seem like the administration may well be cooking the books by projecting anemic growth rates in the economy and robust returns on the private accounts that will be reflecting that same economy?

And about those private accounts -- if the idea is so good, why not simply let workers invest all of their money in the market and get the government out of the Social Security business once and for all? Doesn't the logic of the privatization rhetoric lead to this conclusion? Personal choice, after all, seems to have become a kind of credo.

The reason is simple: Social Security was never designed to be "an investment opportunity." It's a safety net; back in 1936, we even called it insurance. Social Security has always been a kind of a pension, which implies a communal or mutual obligation. An investment opportunity is something that individuals pursue on their own.

The fact is, for many retirees, Social Security remains almost a sole source of income; for others, it's a welcomed addition to a modest IRA account (burdened by exploding medical insurance premiums -- the real problem, after all). For a minority, however, that monthly check is simply a luxury. Vacation money. Entirely discretionary income.

For this last and smallest group, no doubt the personal accounts make a lot of sense. The key point here is that they live out Timothy's story, in which success depends on never having to tap into the money invested. Timothy bought in and let it work, while his parents continued to pay the bills.

But suppose that he, like most people, needed to maintain a cash flow from his investment account on a regular basis. What then? Timothy's account rose nearly 300 percent from its lowest point, from $750 to $2,100. But had he been drawing on that account -- had the number dropped to, say, $300 -- then that same huge percentage increase would put him at only $900. Now imagine that was his last $300, and you can start to see the problem.

Apparently, taking this kind of risk with your last two dimes rubbing together is now viewed as a good thing.

Publication date: 2/17/04
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