Chicago Columnist Illinois Leader Entrepreneur Political Analyst Business Advisor Illinois Review

Wednesday, January 5, 2005

 By Ralf Seiffe

An important lesson all good salesmen learn is to determine a prospect’s real objections.

Often, a person will give a phony objection to misdirect the salesman and protect the real reason they will not buy. As Republicans attempt to sell Social Security reform, Democrats will offer several objections to privatization.

If the reformers want to be successful, they should learn what good salesmen know and position their ideas to smoke out their opponents’ real objections.

The Democrat’s most persistent canard is that investments in the equity markets are “risky”. The fact is that for every long-term period since the Depression, a series of regular investments has produced attractive returns, regardless of the year one started or stopped. Yet, Democrats point to the bubble that burst on their watch in 2000 and construe it to all investment periods. This scares many Americans away from productive stock market investments and permits Democrats to position themselves as the protectors of Social Security.

Any conscious person knows that the system is headed for ultimate insolvency. If Democrats protectionism prevails, no significant changes will occur and with that, we’ll either default on benefits or have to raise taxes ruinously.

Given this, a good salesman would devise a plan that had no investment risk but still allowed workers to own their own social security benefits. He could propose a small change in the current system that would eliminate stock market risk but still increase returns to workers. If so, he’d ask, would the Democrats still object?

To deliver on his proposal, the salesman should point out that right now, Social Security trustees receive more in contributions than they pay in benefits. This surplus is sent to the treasury and in return, the government issues IOUs. Theoretically, when the Social Security surpluses turn into deficits, the trustees will redeem their inventory of IOUs and pay the benefits.

In the broadest Keynesian tradition, Democrats tell us this mounting, unfunded liability is not a problem because “we owe it to ourselves”. The salesman will see an opportunity to leverage that belief but to go one step further.

Instead of the trustees watching over a box of government bonds, why not send the assets directly to the workers? Conceptually, in exchange for making a Social Security contribution (or a Medicare tax payment), the government would issue a bond and send it to the worker. He would own it and the government could tie its maturity to the worker’s expected retirement age so that all the assets would be available at just the right time. To protect from squandering these assets, the government could send the bonds to a bank trust account to be held until retirement just like an IRA.

In this scenario, the worker will accumulate government bonds, the definition of a risk- free asset, over his working career. In effect, he would be doing the same thing as the trustees do now; buying bonds when he has a cash flow from working and liquidating them after retirement.

Our salesman should point out that ownership of real, risk-free assets should appeal to every worker. Rather than some mysterious formula controlled by Social Security actuaries, workers will understand the present value of their retirement nest egg throughout their working career.

They will receive market interest rates that will surely exceed the “return” on contributions to the current system. They can choose when they have accumulated “enough” to retire and when they do, they could reinvest the proceeds, spend what they like and leave the residual to their heirs. Chile can show us how to do this.

The government could still spend surplus Social Security proceeds but their IOUs change from nearly invisible internal debt to very visible external debt. Instead of asking the Social Security trustees to re-finance those bonds at every maturity, those retired beneficiaries will want the government to liquidate these obligations and send cash.

My bet is that the opponents of Social Security reform will invent some new objection to this sort of plan. Even though funded with risk-free, real assets that depend only on the governing class’ good character, even a risk-free investment plan will not be good enough for them to accept reform.

This is where the good salesman should realize that “safety” is not the Democrats’ real objection.

In fact, working to eliminate the “safety objection” will not help move the debate or result in a “sale” because it is a smoke screen. So, like our good salesman, reformers must see through their opponents’ misdirection, determine the real objection and work to eliminate it.

As they attempt to identify the real objection, the reformers will wonder why it is a serious felony for a private company to offer plans in which early investors are paid by later investors but it is a proper pursuit for the government.

Further thinking will reveal that the real beneficiaries of these sorts of plans are the organizers, not the investors. When they do, reformers will conclude that their opponents really object to losing control of the cash flow their pay-as-you-go, Ponzi scheme generates.

This real objection is so profound that even the most talented salesman is not likely to overcome it. At this point, a smart salesman will recognize futility and move on to other prospects. He will know not to waste time attempting to sell reform to the impacted organizers--and the real beneficiaries--of Social Security.

Reformers should recognize they have the same problem as the salesman. Don’t waste time when the real objection cannot be overcome. Move on the the system’s intended beneficiaries.

Pitch them the truth about Social Security with enough facts and projections to make the message resonate. When they do, reformers will position Social Security Reform as an unstoppable idea whose time has come. It is then that they will look like sales geniuses.

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Ralf Seiffe advises business start-ups and product launches from Chicago, Illinois and is a political analyst and columnist for the Illinois Leader.