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Going Private

The Bush plan to privatize Social Security and Medicare is a multi-billion-dollar disaster in the making. Perhaps the best we can do, ironically, is to copy the savings plan that federal employees get.

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At every turn, our newly reelected president wants to let the stock market work its magic to solve the big domestic crises (with our newly reelected Republican Congress, he might just pull it off). The solution to the outrageously expensive Medicare program and attendant skyrocketing health-care costs? Let individuals set up Health Savings Accounts, that’ll do the trick. The secret to solving the inevitable bankruptcy of Social Security? Let people manage the money themselves: They have to do better than the .86 percent annual return the Feds get for them. To this president, privatization is a panacea: Let individuals invest in stocks, and every problem melts away.

In reality, privatization’s a giant canard that rests on three bogus presumptions: Individuals have some innate idea how to invest their own money; Wall Street has its clients’ interests and not its partners’ concerns at heart; and self-directed investing would somehow “fix” the Medicare and Social Security spending gaps because the market always rises faster than the costs of these programs.

You would think that after all the chicanery we’ve uncovered on Wall Street in the past five years, the president would recognize unrequited trust when he sees it. But he and his Treasury secretary, John Snow, who is tasked with Social Security reform, have been completely blind to how poorly Wall Street has helped administer the $1.9 trillion that 42 million people have attempted to save in 401(k)s, and they’re equally out of touch with the losses that individuals have suffered in their attempts to manage their own money during the bear market of the past four years. My advice to them: Spend an hour listening to my radio show when I fix a 401(k). Every week, hundreds of Americans send me their wrecked 401(k)s, mostly with the vain hope that I can somehow repair the largely irreparable damage that they, their brokers, and their human-resources “experts” have visited upon them. Of course, the market’s been a total bummer for four years running, but the myriad accounts I look at have done far worse than the averages. Some of that underperformance stems from pure Wall Street greed: The fees the Street charges to administer these accounts are often outrageously high, and the employer in charge of the administration of the 401(k) often couldn’t care less. Over the long term, high fees are an anchor on whatever returns a 401(k) account does manage to generate. Then there’s the drag from the hidden kickbacks that administrators take to steer 401(k) funds to underperforming managers, a practice just beginning to come to light in recent investigations by New York State attorney general Eliot Spitzer. The fees, the kickbacks, and the outrageous stealing of 401(k) net asset values by hedge funds’ timing of the mutual funds (the supposed fiduciaries), have all helped contribute to a notion that individuals, particularly those who need it the most, can’t trust the investing process anymore. Who are we on Wall Street, after that spectacularly lame record, to merit the trust of the president to help people manage the most important national nest egg out there?

Bush has been completely blind to how poorly Wall Street has administered the $1.9 trillion invested in 401(k)s.

As cavalier and greedy as Wall Street’s been, much of the 401(k) personal-savings debacle can be traced to the American investor himself. As someone who listens to or reads e-mails from literally thousands of investors a week, I’m dumbstruck by how little most people know about even the basics of investing. Almost no one can read a balance sheet. Most don’t know the difference between a stock and a bond. The majority think that diversification means owning Dell, Microsoft, Intel, and Cisco or Bristol-Myers, Pfizer, Merck, and Johnson & Johnson. Few think there’s anything dangerous about putting all of their retirement assets in their own company’s stock, even after the Enron, WorldCom, and Global Crossing fiascoes. The idea that somehow these people are now going to get to handle their own Social Security and health-care accounts should scare politicians to death. Instead, the combination of the need to please the gigantic financial-services industry, which lusts after those safe Social Security dollars, and the president’s unbending faith in the markets keeps the issue on the front burner.

How reckless could privatization be? If I were a cynical Democratic strategist, I would simply cede Bush the whole shootin’ match, confident that by the next election, there would be enough people who had lost big money in their once-sacred Social Security accounts that they could spell the difference for the Democrats in 2008. Alas, the only people who could be counted on to make out well under privatization would be those who are rich enough to get help to do it right, exactly the class we don’t need to help. The poor, who are the least educated about money, would suffer the most.

Of course, the privatization of Social Security or Medicare simply represents a mischievous, if not downright nefarious diversion from the real needs of both programs. For Social Security, we need to raise the retirement age to 70 or 72, to take into account the longer-lived populace. For Medicare, we need to make hard choices about how much we’re willing to spend to prolong life. But if we are going to go forward with some version of privatization, there is, ironically, one way in which we could cut the costs, keep fees low, offer strict diversification, and make sure that nobody gets ripped off: Do it the federal way. That’s right—the much-maligned federal government, which administers a Thrift Savings Plan for all federal employees. The plan strikes a perfect balance of choice with responsible investing. It’s a simple menu of diversified domestic stocks, fixed-income investments, government bonds, and international equities. The TSP doesn’t let individuals screw it up with reckless speculation or let Wall Street jam individuals with high fees and crummy mutual-fund offerings. It’s a better program than just about any 401(k) offering out there.

Of course, the TSP doesn’t enrich the big brokerage firms, and it doesn’t allow you to shoot the lights out. Maybe that makes it too chary for the radical capitalist Republicans. Yet, it’s the best way to insure that the federal government won’t be guaranteeing the ignorant, risky schemes many individuals will choose if they get to choose. Allowing individuals to put some money into a TSP to save for health care and retirement wouldn’t solve the shortfalls, but it would keep the Republicans from furthering the divide between rich and poor that they have so dexterously aided these past four years. With these guys at the helm, that may be the most we can hope for.

James J. Cramer is co-founder of TheStreet.com. He often buys and sells securities that are the subject of his columns and articles, both before and after they are published, and the positions he takes may change at any time. At the time of this writing, he owned Intel.


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