Bottom Line: SS Rx? RIP

By GREGORY FOSSEDAL, UPI Columnist  |  March 4, 2005 at 8:43 AM
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WASHINGTON, March 4 (UPI) -- President Bush's lead piece of second-term legislation, to establish voluntary private accounts for Social Security, may be dead even before arrival. If so, the implications for his presidency and financial markets are substantial -- but depend critically on how the issue is handled from here.

Wednesday's Washington Post carried a headline alleging that Senate Majority Leader Bill Frist had warned that a vote on the issue might have to be delayed into 2006, a congressional election year. He also reportedly mused that Congress might have to remove the private account provision that is the centerpiece of the White House campaign.

Dropping private accounts might keep "the process" alive for a few months, but would kill any reason libertarian and small-government supporters of Mr. Bush have to be excited about the exertion.

Frist aides appearing at the influential weekly strategy session of GOP guru Grover Norquist made "aggressive denials" of the Post story, according to participants. But in private, Norquist, Peter Ferrara, and other leaders of the private-account braintrust are said to be frustrated with the White House's approach, and despairing of success.

A Republican activist who has raised money and led lobbying efforts on Social Security for more than a decade, asked if the plan is being back-burnered, answered: "Back-burnered? It's being buried. It's dead."

It's dangerous to write obituaries for anything the hedgehog-like president is committed to. "George Bush has no track record of giving up on something this important to him," counters Cesar Conda, a respected former advisor to Vice President Dick Cheney. "And he has a pretty good track record of doing what everybody in Washington thought was impossible, like with the dividend tax."

Fair enough, but even taxes, education reform, and drug coverage for seniors failed to excite the kind of monolithic, unified, and passionate opposition by Democrats that the third rail of government does. "I promise you," Howard Dean reportedly told an influential investor and supporter last month, "I am not going to be the Chairman of the Democratic Party who oversees the dismantling of Social Security."

In an effort to both shake a few Democrats loose, and build enthusiasm for the proposal among younger voters, the White House made a strategic decision in November to highlight the crisis aspects of the program. The problem with that approach, reform activists say, is that it draws attention away from the poor rate of return on Social Security payments that is one of the most appealing reasons for change. It also turns a discussion of wealth management into a "cash flow" discussion that Republicans generally lose.

The effort has created an aroma of manufactured, not legitimate, crisis, given that the program's crunch doesn't arrive for another generation and a half. "The president has been giving speeches for two months now," a Republican congressional aide who supports Bush's program notes, "and the poll numbers have actually gotten worse." Thirty-one percent, according to a poll released this week.


Worst of all, the "crisis"-mongering at once rallied Democrats, resentful even now of Bush's relatively narrow re-election win in 2004, and popular-vote loss in 2000 -- while raising the concerns of seniors that in a true "crisis," there may be benefit cuts.

The bitterness of Bush's opposition is difficult to underestimate. "I can tell you," a Senate Democrat advised more than a month ago, "Democrats are not going to fold on this. Not one. We are not going to go to war on Social Security because this White House says there may be weapons of mass destruction in 2040."

Many Democrats smugly note that Mr. Bush has used bipartisan rhetoric, both in November and in a recent invitation to engage in dialog about restructuring the program. But there has been little action, such as appointment of a prominent Democrat or two on domestic affairs, to make Bush's opposition trust in a collaboration.

White House lobbyists hold forth hope that some Senate Democrats, such as the tirelessly bipartisain Joe Lieberman, might we open to discussions. Such a defection appears to be farther off now, though, than it was in the fall.

Senator Kent Conrad recently flew back to North Dakota on Air Force One, arriving to a rally of 7,000 Social Security reform enthusiasts. Conrad reportedly told the president he was open to the idea of private accounts. He also has carefully avoided the kind of aggressive criticism of the scheme undertaken by most Democrats.

At the same time, Conrad says he is opposed to "any fiscally irresponsible schemes that would require massive borrowing or that rely on budget gimmicks and Enron accounting to mask costs." Conrad has reportedly made a firm commitment to fellow Democrats not to break ranks unless the party approves.

Democrats appear to want a win, period -- and believe that when the party remains unified, it can beat the president. "If we could pass McCain-Feingold and Sarbanes-Oxley over Bush's dead body," one Democratic strategist chortles, "we can certainly hold 41 votes to block the dismantling of the New Deal."


Senior White House sources say there is a re-think going on, but no clear strategy for revising how the issue is presented -- hoping that increasing the volume will produce an unexpected reversal of trend.

Mr. Bush could simply fold his cards and cut his losses. This is highly unlikely given his determination and belief that Social Security reform is a vital challenge. At the very least, there will be a more energetic effort to dig out of the hole, as the White House seemed to suggest this Thursday in announcing a "60 rallies in 60 days" plan.

The White House could up the ante. "We need to raise the heat on Democrats," a Social Security reformer comments. The problem is, recent efforts haven't raised any heat. Many Democrats actually hope the Administration adopts this approach, turning what would have been a significant, but limited, early legislative setback into a high-profile domestic-agenda Waterloo.

As much as they worry the issue will be dropped, many Republicans fear even more that the White House will adopt a "signing ceremony" strategy -- giving in on provision after provision in a forced march effort to simply get any bill entitled "Social Security Reform Act" enacted.

Those activists hope that if the 60-60 effort fails to move public opinion, the White House will agree to take a two- or even four-year approach to the issue -- backing off the barnstorming, and finding current and former congressional Democrats to collaborate in a 6-9 month, low-key discussion of options.

A key would be to defuse the partisan passion over crisis management, and focus discussions instead on wealth management for younger Americans. White House strategists are already floating names -- Jack Kemp, Robert Kerry, John McCain, Robert Strauss -- for such an effort. The really key "60" is not days or rallies, of course, but Senators -- the number needed to overcome a certain Democratic filibuster.

Perhaps the best concept, mentioned by both Bush allies who are enthusiastic about the Social Security effort and those who are not, would be to link, merge, or supplant the effort. For example, SS reform could be combined with, or preceded by, efforts to extend the Bush tax cuts or reform the code altogether.

Either way, there would suddenly be a possibility of involving Democrats in the discussion. And a couple of wins -- today, tort reform and tax relief, tomorrow... -- would strengthen Bush's hand for a different approach to the issue later in his second term.


Markets reacted calmly and even favorably this week as the press speculated about the plan's demise. During Greenspan's Wednesday testimony, the body language from both the Fed Chairman and House Republicans was tepid and cautious; Greenspan pointedly declined to say, despite GOP urgings, that setting up private accounts is a higher priority than other proposed Social Security changes.

Yet despite the setback for the White House, a strong oil price, and concerns about the pace of Fed interest rate hikes, the Dow hovered close to multi-year highs.

It may be that investors believe the plan will fade quietly, and be replaced by a more immediate emphasis on spending cuts and tax relief.

This view may be overly sanguine. If the White House decides to go to the mattresses, the revision in lobbying priorities won't take place. And if, as seems likely, the reform fails even after an extended effort, Mr. Bush would suffer an inevitable loss of prestige and political capital.

More likely, Mr. Bush will make a reasonable effort, gradually adjust his course, and ease into a broader emphasis on tax reform -- or a change in lobbying chronology placing it first -- over a period of months. The approach will resemble the White House's relative patience with Iran and North Korea -- rather than the determined effort to press forward with war in Iraq.

The result should be mildly good for U.S. equities, especially assuming a continued steady tightening by the Federal Reserve, jobs stability, and perhaps even some upside earnings surprises in the second quarter. With the Bush foreign policy enjoying success across the board, a prudent re-assessment of Social Security will bring a modest, but not a major, loss of clout. Still bullish.


(Gregory Fossedal is an advisor on global markets and ideopolitical risk to international investors, and a research fellow at the Alexis de Tocqueville Institution. His clients may hold long and short positions in many of the investment securities and opportunities mentioned in these reports. Investors should perform their own due diligence and consult their own professional advisor before buying or selling any securities. Mr. Fossedal's opinions are entirely his own, and are not necessarily those of his clients, UPI, or AdTI. Furthermore, they are subject to change without notice.)

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