GEOFF COLVIN: The fight over Social Security reform is intensifying, and it's proving tougher than President Bush or his allies expected. The past couple of weeks he's been on the road selling like mad, his opponents have been countering like mad, and the bottom line is prospects for private accounts are dimming, though not extinguished. Now nearly everyone agrees we're approaching do-or-die time for any kind of reform. It's getting ugly -- we'll see some of the dueling commercials -- but who will win the battle and who will win the war? Stephen Moore is president of the Free Enterprise Fund and an economist with the Cato Institute who supports President Bush's reform plans. David Certner is director of federal affairs at AARP, which opposes Bush's plans.
Stephen, support for the President's idea seems to be declining. There's a Wall Street Journal NBC news poll last week found people oppose it 55-35, which was a slightly greater margin than a couple of months ago. What's the problem? If Social Security is in crisis, why can't the President get any traction on this?
STEPHEN MOORE: Well, there's a reason that this is the first president since Franklin Roosevelt who's actually taken on this issue and talked about really reforming and modernizing it, and that reason is that politically it's very treacherous to talk about changing Social Security. It still is one of the most popular programs.
The point that President Bush has tried to make -- I don't know if he's made it all that successfully -- is number one that the system is in a lot of financial trouble, and I think actually he has made that case to the American people. Most Americans do understand with 80 million baby boomers about to retire we've got a big problem.
He hasn't made a very strong case for the real essence of his reform package, which is these personal investment accounts that every worker would have. And if he's going to win this battle, what he has to do is convince those workers under 40 that it's a good deal financially for them to have these accounts, and then he has to convince the senior citizens that this is not going to hurt your chances of getting Social Security benefits.
COLVIN: Because it's not going to affect them at all.
COLVIN: Right. But the big problem seems to be this idea of risk, right? People are afraid that a private account of any kind is risky and they don't like it.
MOORE: Well, it depends on who you ask. If you ask young people, they're wildly enthusiastic about the idea. When you tell people, you know what? You can take 5 or 6 percent of your paycheck that now goes into taxes and you can put that into an IRA you own yourself, I mean young people get very enthusiastic about that idea. It is true that when you look at the polls the older people get, the less enthusiastic they are about it. And you're right. President Bush has to convince people this isn't that risky. In fact you could create these accounts in ways where you put just bonds and T-bills in the accounts and they would have very little risk.
COLVIN: No stock market component at all.
MOORE: That would be a very risk-averse portfolio if you could do it that way.
COLVIN: It is conceivable.
COLVIN: David, do you think Social Security is in crisis?
CERTNER: Of course it's not in crisis. We see the numbers from the Social Security Administration and others. They say that Social Security has a long-term problem. We know that there are more older persons. We know they're living longer, but we know the actuaries tell us Social Security has enough funds to pay money for another 40 years. At that time there will be a 25 percent shortfall. And we as well as others have said we've got this long-term shortfall, we want to make changes, we want to do it right to make sure that Social Security will be there for future generations as well as current generations.
COLVIN: But you vehemently oppose the idea of private accounts.
CERTNER: Right, because here is the problem. The problem with Social Security as we've just described it is that because of a demographic issue, people living longer, we are going to not have enough funds four decades from now to pay the fully promised benefits, so we need to make changes to make sure we can pay those benefits. The President has I think laid that on the table.
But the proposal that the President is putting out first, and really the only major proposal, is to take money out of Social Security. Now the reason we oppose that is because if you have a long-term shortfall, you can't start by addressing that shortfall by taking money out of the system. That only makes the problem worse.
COLVIN: What about the idea of letting what they call add-on accounts? In other words, letting people set up accounts, put their own money into them, but separate from what is already being paid into Social Security. That hasn't been proposed, but how would you feel about it?
CERTNER: Well, this is an important point, because the issue here really isn't, "Is investing and saving for retirement a good or a bad idea?" Of course it's a good idea. Everybody believes it's a good idea. We even encourage people to save and invest through their 401(k)s, through their IRAs. We want people to save in addition to Social Security, and if we can do more to encourage more people to save for retirement, great.
The problem is Social Security is a different kind of system. This is a system that buys a guarantee of income for people at all ages, because it's not just retirement. It covers disability and other things as well, and that's what we want to preserve. That's where risk is not appropriate. So add-on accounts, great idea. We want to help to encourage those.
COLVIN: Okay, Stephen, see this is the point where I think people have a lot of problem with the idea of reform. The proponents say yes, you don't have an account with any money in it, right? There is nothing there that does in fact have any real value.
MOORE: A lot of people don't understand that. They think there's a little bank vault with their name on it with money, but there isn't.
COLVIN: But there's not.
MOORE: There is no lockbox.
COLVIN: But what people believe is that they have something at least as valuable, which is a promise from the United States government. Now what's wrong with that?
MOORE: Well, a couple of things. The way I like to tell people about Social Security issues, there's two real problems with it.
One is that it does have financial problems, but you're right. We can solve those financial problems by just raising the taxes and lowering the benefits.
But the other problem with Social Security is a much bigger one for young people, and that is that the New Deal is a raw deal. It's just the fact that these people are putting money into Social Security and they're just getting a terrible rate of return on the money they're putting in. And so those who support the personal accounts, as I've supported for 20 years, are saying to young people, "Look, if you can put some of this money into a personal account and you can tap into this power of compound interest over 40 years, you're going to have a retirement benefit that's about twice of what Social Security will pay you and you get to own it."
And that's the other part that President Bush really feels strongly about and I do too, is that you can really create this ownership society by allowing every American to own stock.
COLVIN: David, Stephen says that young people are in favor of private accounts. Do you find the same?
CERTNER: Well, we find that younger people are in favor of private accounts because they've had good experiences with their 401(k)s and their IRAs and we support that. But we're finding that younger people, once they understand the Social Security story, are not favoring private accounts in Social Security, and there's a couple of reasons for that.
One, they do like the security of Social Security as well, and when they understand what comes along with taking money out of Social Security for private accounts, they turn against it very dramatically. For example, you can't take money out of Social Security and assume that everything is going to be fine. Right now the money you're paying into Social Security goes to pay current benefits. If you take the money out of Social Security, you've got to then add money back in somewhere else to pay for current benefits. Otherwise people on the system or near the system aren't going to get their money. So you may be putting in, you're going to be taking out but you're going to be putting in, so it's a wash deal in those terms.
MOORE: The problem, though, with the system is that if a private company tried to run a pension program the way Uncle Sam and Congress have for the last 70 years, I mean they'd literally throw members of Congress in jail.
COLVIN: It would be illegal.
MOORE: You can't take pension money, and what they're doing with the pension money in Social Security is they're spending it on other government programs. They're spending it on military weapons systems and road projects and Lawrence Welk museums and all the other things that the government spends money on. So the money is already being taken out of the account. This way with the personal accounts you tell the young people, look, the government can't take this and misspend it because it's in your own bank account.
COLVIN: Yeah, so if I understand properly, I mean the opponents of reform say well, look, if we started taking money out to put into private accounts, government would somehow have to cut programs or increase taxes to make up the difference today. Proponents of reform say unless we do something, when we get 30, 40 years down the road, government will have to drastically cut spending or raise taxes in order to pay the benefits that would be due at that time.
MOORE: We have to pay the piper now, or we have to pay the piper 20 or 30 years from now.
CERTNER: Well, I think that's going beyond it, because what we're talking about now in this transition is trillions of dollars more in debt now. In fact, we'd be taking on more in debt than it would take to fix the whole system all by itself.
We think we should take steps to fix the system, and we think, actually, quite frankly, it's a good idea to stop having Social Security simply turning all its money over to the federal government for spending. We've suggested that some of the money instead of just being put -- as is required by law now -- in government bonds, that the system itself could invest in other diversified funds, which would insulate individuals from risk and perhaps if people believe it provides a greater return, get that for Social Security.
COLVIN: Well, President Bush is cranking up the fight over this right now, campaigning heavily, which means the opponents are also out there campaigning heavily, running virulently opposing commercials. We're going to take a look at one of them. This is a pro-Bush ad from a group called Progress for America.
COMMERCIAL: President Bush wants to rescue Social Security. He asked for all ideas to be put on the table. Can you think of any ideas that national Democrats have offered? Democrats have no solutions for Social Security. None. Tell Congress that Social Security is too important for partisan games.
COLVIN: Well, David, it's not your job to represent the Democratic Party, but the point here is, gee, if the opponents of President Bush think Social Security is a problem that needs to be fixed, why didn't they say anything about it or propose anything significant until after he did?
CERTNER: Well, I think we're still facing the same problem. The problem that's been laid on the table by the President and others is that we have a long-term problem with Social Security solvency four decades from now. Neither the President nor anyone of the leadership in Congress has really put any ideas on the table about how to deal with solvency. The President himself has acknowledged that his idea of private accounts doesn't do anything to address solvency.
So right now we really have not gotten into the solvency debate at all. We're still debating this whole idea of whether private accounts in Social Security is a good idea or a bad idea.
COLVIN: And bottom line, your solution, your preferred solution to the Social Security problem is to adjust some of the dials on the existing system, meaning you could increase the taxes a bit, maybe postpone retirement age down the road, maybe adjust the benefits somehow?
CERTNER: Right, that's exactly right. We can make these modest adjustments that we've done in the past to ensure that Social Security will be there in the future. We know it's good right now through four decades from now. It doesn't take much to make sure that it will be good throughout the rest of the century.
MOORE: And my response to that, to young people, is you already know Social Security is a lousy deal for you. Why do you want to pay more in and get less out? In other words, what they're proposing is to make a bad deal for young people an even worse deal. That's why personal accounts is so much better for young people.
CERTNER: But I think we have to disagree with the notion that Social Security is a bad deal, that Social Security has…
MOORE: It's a one or two percent return on your money.
CERTNER: Well, but you're just looking at Social Security as rates of return as if all it did was provide retirement income, and of course we know that's not true. Social Security is part investment return and part insurance. Social Security ensures against lots of things. It ensures against you becoming disabled.
COLVIN: There's a disability and survivors component as well.
MOORE: But we're talking about the retirement program, (which) is a lousy deal.
CERTNER: But as I'm saying there's more. It ensures benefits to survivors. It provides benefits to surviving spouses. It ensures against people who have lower wages throughout their lifetime, because it has a progressive benefit structure, and it also ensures that you can't outlive your money. You can live to 110 and Social Security is still going to be providing you a lifetime guaranteed benefit, and that's just something that an individual account plan cannot do.
COLVIN: David, your organization, AARP, is running a commercial fairly heavily now that opposes private accounts. Let's take a look at that.
COMMERCIAL: Yeah, it looks like the drain is clogged. Only one way to fix it. We're going to have to tear down the entire house. What? If you had a problem with the kitchen sink, you wouldn't tear down the entire house. So why dismantle Social Security when it could be fixed with just a few moderate changes. Reform is necessary, but diverting money into private accounts is just too drastic. It could add up to $2 trillion in more debt and lead to huge benefit cuts. For more visit AARP.org. Paid for AARP.
COLVIN: Stephen, it's a very funny commercial, and it does seem to get at the point that bothers people most about this, which is, gee, couldn't we fix it in a more, a smaller way?
MOORE: Well, I think actually the funny thing about that commercial is I think that the wrecking ball is what happens if we don't change the system. I think the system will collapse under its own weight, especially when you consider the big problem with Medicare, which is the healthcare component of our system. And so I really think that's what happens, folks, if we don't change the system today.
COLVIN: I don't want to get too inside the Beltway, but when we think about what's actually likely to happen here, a lot of people who know a lot about the workings of Washington, as you two certainly do, say they guy to watch is Rep. Bill Thomas, chairman of the House Ways and Means Committee, Republican of California. How influential is he going to be in the actual outcome of this?
CERTNER: Well, I think you have both of the committee chairs in the House and the Senate, Sen. (Chuck) Grassley (R-Iowa) and Chairman Thomas, are going to play key roles. They sit on top of the committees that are going to be dealing with this.
Quite frankly, many people right now believe that it's the Senate that's going to go first. So watching if there's any kind of compromise that can develop in the Senate where there's a little bit more balance between the parties and the power that they control, that may be really the key to watch. Can a group of people come together, can they decide let's deal with solvency, let's deal with additional savings incentives, and let's move away from these kinds of plans that take money out of Social Security for private accounts?
MOORE: I would say the thing to really keep an eye on is, will there be any Democrats that break with the orthodox Democrat position today? You go back 10 years ago, and you had the godfather of Social Security, Daniel Patrick Moynihan was in favor of this, you had Chuck Robb, you had Charlie Stenholm in the House. There were a lot of centrist Democrats who said, "Yeah, let's experiment with this."
Where are the centrist Democrats who say let's explore this? That's been the frustration for reformers like me, is that the Democrats don't have any centrists who say, yeah, let's explore these kinds of opportunities. The clock is ticking, because as you know in 2017 is the year when the system, which is now in surplus, starts to go into deficit.
COLVIN: It will have to pay out more than it takes in. Well, gentlemen, there is obviously a lot more to be said and fought over with this issue, and we will be keeping track of it. So David Certner and Stephen Moore, thanks so much.
MOORE: Thank you.
CERTNER: Thank you.
Peter Cohan interview
KAREN GIBBS: Investing your retirement in stocks can be a risky business, but few will argue that over time stocks outperform every other asset class. Much of today's market analysis assumes a link between a company's financial performance and its stock price. But that link doesn't account for a product's appeal to investors, or the effect of a popular spokesperson. So how can you really tell whether a stock is worth the risk? What tools can individual investors -- responsible for their own success or failure -- use to succeed in the market? Peter Cohan, author and president of a management consultant company that bears his name, says buy good companies with good stocks, and exploit information imbalances.
Well, Peter, I was always taught that the markets are efficient, everything is in there. How can you say that there's an information imbalance?
PETER COHAN: Well, I was taught the same thing, and so when I got out to the real world and started looking at stocks what I discovered is that there are examples of where a company that does well financially does well in the stock market...
COHAN: Like a classic example is probably Valero, which is a refining company that's had its stock up over 300 percent in the last five years, and its revenues and profits have just been skyrocketing. It's been doing fantastically well and taking advantage of the increase in oil prices, but in the last couple of weeks it's been bouncing up and down as the price of oil has gone from a record $57 back down to the 50s. So it's very hard even with that kind of a company which has done fantastically well to look at it reliably as an investment because its price is very dependent on what happens to the price of oil.
GIBBS: So what is an individual investor to do? How can they take advantage of the information that they have around?
COHAN: One thing that they can definitely do is try to avoid investing in all kinds of other stocks, like Martha Stewart, which is a classic example of a company whose stock did phenomenally well between December of 2003 and March or 2005. This was a company that people were investing in because they like Martha Stewart. You know, she was in jail. They said how can we help her? They figured, well, we'll buy the stock. So they bought the stock. The stock kept going up and up and up. Meanwhile, the company was not doing well. And so investors can actually profit from avoiding that kind of a bad decision.
They can also pay attention to companies that are doing well financially but aren't doing well in the stock market. A classic example of that would have to be Wal-Mart. I mean Wal-Mart is the largest company in the world. Its revenues and profits have grown 16 percent and 14 percent respectively, and yet over the last five years the stock has actually lost a quarter of its market value. So you've got to avoid companies like that.
GIBBS: You've mentioned Martha Stewart as a CEO and how everybody really likes her and buys the stock because of that. Let's talk about the CEO as an icon now. How come some of them stick around and their companies are not doing well and others get shown the door actually?
COHAN: Well, it's a very interesting question. I've been thinking a lot about that. In one of my books, Value Leadership, I talked about how the CEO is in many ways like a politician and has to deal with different constituents.
In the case of a company, the different constituents are the stockholders, represented by the board, customers, employees, and the broader communities. And if a CEO is doing a good job of understanding the expectations of those different constituents and managing the companies so that they actually exceed their expectations, then they really increase their odds of having job security.
And we talked about Cisco Systems, for example. The stock is down 74 percent from its high, but John Chambers, the CEO, is very solid in the company. The financial performance is doing well, and he has good relations with the board, with his employees, with his customers, and with the broader communities. So his position is relatively secure, whereas Carly Fiorina -- the stock was down about 55 percent under her tenure, not as bad actually as it was under John Chambers -- but she managed to irritate some key constituents in her organization and they were looking for a way to change her role in the company, and part of it was because she wasn't managing the relationships with the constituents well.
GIBBS: So what's an individual investor to do? Reading all the information, as they say, by the time it's in the headlines, it's in the stock price, and we generally come in at the last, right at the end.
COHAN: Well, there's two things that they can do. First of all they can recognize that stock investing is very, very risky, and if they're really concerned about not losing their money, maybe they should put the money in a money market fund or something which is very, very safe. It won't earn much of a return, but at least there's a greater chance that they won't lose the money. Another thing they can do, if they want to take advantage of the long-term value of a stock appreciating over the long term is to buy shares in a low cost index fund which captures the stock appreciation over the long run and invest in it regularly.
GIBBS: It's very difficult to talk about the general market because there's so many pressures, and right now, you just mentioned index funds, but they're pretty much underwater because the major averages are underwater thanks to higher interest rates, higher oil prices. What can an investor do other than index funds? Where is some value that you're seeing right now?
COHAN: Well, the one area that I've seen that's had tremendous value since the current administration took over back in January of 2001 is something that I call the W Industrial Complex Index.
GIBBS: W for?
COHAN: George W. Bush. And these are companies in the energy industry, the defense industry, certain high end retailing properties and certain communications companies. And I've tracked these stocks since January 2001 and earlier this week. They were up 101 percent as an index, whereas the S&P 500 was down 13 percent and the Nasdaq was actually down about 23 percent since January of 2001. So this area of the economy has been doing extremely well and the stock prices have been doing very, very well.
And two of the best companies in that are Valero, which I mentioned before which is a refinery, and the other one is United Defense Industries, which is a company that was actually, 22 percent of which is owned by the Carlyle Group, and it's had an over 200 percent price appreciation since its initial public offering in early 2002.
Now one of the things that got me started on this whole effort to describe the stock market was a little program that my daughter has -- she's in the ninth grade -- and they have a stock picking program, and she sent me an e-mail and said "What can I short?" And I told her it's very, very dangerous to short stocks, but if you're going to short stocks you can make money if you get into a company right before it goes bankrupt. And it turns out that a couple of years ago I identified some companies like Williams Communications Group and Exodus Communications which had these characteristics of having a lot of debt and losing lots of money and about to violate their agreements with the banks, and they both went bankrupt.
And now we have some examples in the auto supply industry. There's a company called Collins & Aikman and another one called Visteon, both of which have similar kinds of situations. They're both very heavily indebted and they're both losing lots of money, and the S&P has said that companies in this sector, because Ford and GM are showing lower revenue forecasts for the year, those suppliers are going to be hurt.
So if you find suppliers that are losing a lot of money, are heavily indebted, it may be possible to make money shorting those companies.
GIBBS: A lot of people are saying that the economy is on solid ground and therefore the stock market, which is a leading economic indicator, should be a lot higher. What's your outlook of the general market?
COHAN: My outlook on the general market is really negative. I mean the way I look at it is that we have this huge amount of debt. We actually raised the debt ceiling above $7.8 trillion. So we've got record levels of debt, we've got a record level, a federal budget deficit of over $400 billion last year. We've got consumers who are borrowing very heavily. And all these things are exacerbated by the fact that oil prices are at record levels. So the Fed is seeing inflation coming into the economy, and the way that the Fed deals with inflation coming into the economy is to raise interest rates.
So you've got this whole economy hyped up on debt, and now the Fed is talking about raising interest rates to tamp down inflation, and that's going to cause bankruptcies. I mean people who are borrowing money to buy things, to buy houses, to finance the government, I mean at some point or another they're going to have to pay back that debt.
GIBBS: Should we then hold on to real estate?
COHAN: No. Real estate has gone up tremendously over the last couple of years because of the low interest rates, but again with the interest rates going up, you know, there's tremendous fevers to buy real estate in different parts of the country. And anybody who has real estate as an investment right now should look at that fever as an opportunity to sell before things go down. I remember back in the mid 1980s when we purchased our home in Massachusetts, we purchased at the peak, and it took nine years before it got back up to where it was back when we first purchased it.
GIBBS: Peter Cohan, it's a pleasure. Thanks for joining us.
COHAN: Thank you very much. It was a pleasure.