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Gingrich’s Social Security plan relies on pixie dust

Newt Gingrich has been hinting and more than hinting that he favors the privatization of Social Security.
REUTERS/Adam Hunger
Newt Gingrich has been hinting and more than hinting that he favors the privatization of Social Security.

Newt Gingrich wants to convert the traditional Social Security system to a privatized system based on the Chilean model. And he has some so-far inexplicable idea to finance the transition with the $2.7 trillion in the Social Security Trust Fund.

I’ve been asking the Gingrich campaign for several days how he would tap into the trust fund without imposing a significant and almost immediate cut in the benefits of current Social Security recipients. His team hasn’t answered that question, at least not to me, and I doubt there is an answer that doesn’t rely fairly heavily on pixie dust.

I just talked to Michael Tanner of the Cato Institute, one of the long-time guiding lights of the movement to privatize Social Security. I read him the Gingrich quote about the Trust Fund. His reply: “Utterly ridiculous.”

But Gingrich — who has talked about this stuff before, but that was back when no one was paying attention because he was trailing so badly in the polls — is going to make a Social Security speech in New Hampshire today, so maybe he will clear up the mystery or at least be asked about it.

Gingrich has been hinting and more than hinting that he favors the privatization of Social Security (although those who favor it have all but stopped using the word “privatization.”) In his current “21st Century Contract with America” on his campaign website, Gingrich says:

“We must consider a voluntary option for younger Americans to put a portion of their Social Security contributions into personal Social Security savings accounts. Other countries, such as Chile, have found that this model creates vast savings while giving beneficiaries more control over when and how they plan to retire.”

The basic idea
There’s code and smoke there, but the basic idea is to convert Social Security from a pay-as-you-go, guaranteed-benefit system to a system of individual retirement accounts in which workers invest in stocks, bonds and mutual funds during their working lives and use the proceeds of those investments during retirement.

Chile, which Gingrich cites, has such a system. But one big difference is that Chile didn’t have to convert from a pay-as-you-go system. Leaving aside all the arguments about which system is better, one big barrier to the private-accounts idea in the United States is that if young workers start putting money into their own accounts for their future retirements, you won’t have the money flowing into the system to pay current retirees.

Two weeks ago, at a little-noticed one-on-one debate between Gingrich and Herman Cain in Texas, Gingrich solved the problem with a wave of his hand, thus:

Gingrich: “It is a fraud and a lie the way that Congress deals with Social Security. The American people have put money into a trust fund. It is not hidden. It is there. But every politician in Washington wants to find a gimmick to balance the budget off the backs of working Americans.

“If you take it off budget, you could solve Social Security. You take what’s in that fund, and you model it on what’s in Chile, you find with a few modest cuts in spending you get to a stable retirement program.”

This is the statement caused my jaw to drop and that Michael Tanner, who has been advocating for Social Security privatization for decades, labeled as “utterly ridiculous.”

Simply put, any money that the government takes out of the Social Security Trust Fund to finance the transition to individual investment accounts for younger workers would equal a cut in the scheduled or promised Social Security benefits to those already at or near retirement.

If, as Gingrich said in Texas, “you take what’s in that [Social Security Trust] Fund, and you model it on what’s in Chile,” you would be imposing an immediate cut in the benefits paid to those already on Social Security — a cut that would grow over the next 25 years to between 25 percent and 33 percent of the current promised benefits to those already retired who would have no private account.

Unless, of course, Gingrich believes the same money can be given to old people and young people at the same time, which is how it appears.

I hope he will shed further light on this today at his Social Security-themed talk at St. Anselm College.

Reagan-O’Neill deal
There’s a lot more that could be said here if you don’t understand the scheme that Ronald Reagan and Tip O’Neill cooked up in 1983 to extend the solvency of Social Security. They put in place a gradual increase in FICA taxes (worth trillions over the life of the plan), a gradual increase in the age of full retirement benefits (saving trillions in the distant future) and created a couple of decades when FICA would bring in tens of billions every year more than was needed to pay current Social Security benefits.

The “surplus” was to be “saved” for the distant future (which is just now arriving) when current FICA collections would no longer be enough to pay all promised benefits. These “savings” were placed in the Social Security Trust Fund in the form of U.S. government bonds. The current value of those bonds is about $2.7 trillion.

Since government bonds are government debt, the Social Security Trust Fund consists of funds that one branch of the government (the general Treasury) owes to another branch (the Social Security Trust Fund). And we have just recently hit the moment when the bonds will have to start being redeemed in order to keep Social Security benefits flowing at the full promised level.

It’s also true, as Gingrich said in Texas, that this plan enabled the non-Social Security parts of the government to conceal a big part of the deficit every year, because it could cover that portion over with money it was borrowing from the Social Security Trust Fund. Understandably, many people saw this owe-money-to-ourselves as a somewhat fraudulent scheme. I agree with Gingrich that borrowing the trust fund and using it to make the deficit and look smaller is deceptive and wrong.

Personally, I don’t see “fraud,” because the whole deal was done in plain public view. But I do see trouble ahead because the general Treasury has no obvious way other than borrowing to get that $2.7 trillion. The plan would look a whole lot better if the government had not in the meantime run the regular debt up over $10 trillion.

Without explaining too much about his thinking, Gingrich takes the position that the trust fund is real, and then he makes his strange leap: It’s real, and we can take it and use it to pay for the transition to a privatized Social Security system.

That might be true if the non-Social Security portion of the government had $2.7 trillion lying around and if it hadn’t already promised to use the $2.7 trillion (that it doesn’t have lying around) to keep paying promised benefits to seniors.

Lastly, even if the whole scheme plays out as it was originally planned and the non-Social Security portion of the government finds or borrows the trillions necessary to redeem the trust fund bonds, the trust fund is currently scheduled to be exhausted in about 2036. At that point — although alarmists often say that Social Security would be bankrupt – the FICA collections would be enough to pay between two-thirds and three-fourths of promised benefits.

I trust that Mr. Gingrich will make all this more clear later today.

Comments (27)

  1. Submitted by Ray Schoch on 11/21/2011 - 11:46 am.

    “I trust that Mr. Gingrich will make all this more clear later today.”

    As do I.

    I, too, see nothing fraudulent in the original, New Deal idea behind Social Security. It’s modeled after the German retirement plan established by Otto Von Bismarck – not exactly a bleeding-heart liberal. If there’s any fraud, it’s in the behavior of several successive Congresses in “borrowing” from a “trust fund” that essentially consisted of debt in order to cover their own fiscal irresponsibility. The Clinton and Bush administrations are not immune from that same criticism.

    This is what makes right-wing threats to default on the government’s debts not just scary, but full-on, institutionalization-worthy, crazy. “Let’s not limit ourselves to destroying the world economy, let’s go ahead and betray our own “greatest generation” and their children while we’re at it.”

    Those who’ve not been comatose during the past few years might have second thoughts about abandoning a retirement plan that pays modest defined benefits for the “attraction” of a retirement plan that promises only that you’ll get what the market will bear when you retire. That might come up smelling like modest, gently-smelling roses if things are going well, but it might also come up smelling like the rankest manure if they’re not. I think it’s interesting that people who label themselves as “conservative” are more than happy to gamble with other people’s futures by relying on a financial mechanism – the stock market – over which no one of either party has any real control, and which has demonstrated substantial… um… volatility, shall we say… over the past several years.

    The beneficiaries of this sort of switch are the same “too big to fail” Wall Street personnel and institutions that have already crippled our economy.

  2. Anonymous Submitted by Anonymous on 11/21/2011 - 11:59 am.

    Not to mention the horrible rate of return that has been achieved in Chile – necessitating the government to backstop retirees, nor the little secret that the program in Chile was instituted by Pinochet.

  3. Submitted by James Hamilton on 11/21/2011 - 12:18 pm.

    Silly me, don’t we already have tax-advantaged private retirement accounts known as IRAs, 401Ks, 403Bs, etc.? Is it just that Gingrich wants the employee’s 6.2% freed up for private investment? Or does he intend to eliminate the employer’s contribution as well?

    I know: it’s all about the freedom of the individual to spend his or her money as he or she sees fit and provide for their own old age. That’s worked so well since 1776.

  4. Submitted by Dennis Tester on 11/21/2011 - 12:43 pm.

    Good grief, you people are hilarious. Don’t any of you hold 401k or IRA accounts? Where do you think your retirement income is going to come from? lol

  5. Submitted by Thomas Swift on 11/21/2011 - 02:16 pm.

    “And we have just recently hit the moment when the bonds will have to start being redeemed in order to keep Social Security benefits flowing at the full promised level.”

    How is the Treasury going to pay for those redemptions? Pixie Dust!

    “Personally, I don’t see “fraud,” because the whole deal was done in plain public view.”

    Isn’t that the defense Bernie Madoff used?

    Gingrich obviously hasn’t got all the “T’s” crossed, or “I’s” dotted, but he deserves credit for keeping FDR’s Ponzi scheme under the public’s nose. See, Eric, it’s all well and good to say “we did it in plain sight”, but that doesn’t mean much when the public isn’t alerted to pay attention.

    That may be the greatest contribution Gingrich, and other GOP leaders have rendered to our country in the past decade, and is certainly more than any Democrat is, or has contributed.

    Someone is going to be on the hook when the well runs dry, why not start with the current crop of suckers, erm, I mean recipients?

  6. Submitted by James Gries on 11/21/2011 - 02:30 pm.

    Judge Ray Holbrook, the Judge that implemented the Galveston plan has endorsed a new plan that keeps, and invests retirement dollars on main. More importantly it keeps our retirement dollars out of politicians. Here’s an outline of the plan:

    1. Fully funds current Social Security retiree obligations until the day the retiree expires
    2. Creates a new portable Individual Community Investment Retirement Account an ICIRA for millions of working Americans whose paychecks are subject to Social Security taxation
    3. Broadens the Social Security funding base by establishing an annual Base Line Assessment or BLA (4% in 2010) paid by the plumber, the President, and the CEO; eliminates the Social Security wage cap
    4. Phases out NEW (operative word) Social Security retiree obligations over a 35 year period
    5. Creates new member owned Community Investment Pods or CIPs in each of the 435 congressional districts
    6. Establishes a new funding source for local bonding needs such as bridges, roads, or schools; Wall Street banksters are no longer needed – Creates millions of jobs
    7. Turns the 2.6 trillion dollar general revenue fund retirement liability into a contingent liability over time
    8. Establishes a safety net or “term like” insurance policy protecting worker owned ICIRAs against major losses
    9. Creates main street checks & balances to protect the people’s interests, and
    shields elected representatives from special interests
    10. Makes millions of working Americans economic partners in their respective

    Find all details at that’s all about the rest of the people too.

  7. Submitted by Bill Gleason on 11/21/2011 - 02:34 pm.

    Sorry, Dennis…

    When people work hard their entire lives, it is immoral to simply put them on an ice floe at retirement. As for those who have 401 Ks and related investment instruments – they are getting even more sensitive to how precarious these accounts are for surviving in retirement. Your cavalier attitude would be laughable, except it is all too common among you and your confreres.

    Although some in the GOP may not realize this, most of the American people are starting to realize the implications of the GOP plans to cut social security and medicare. Oh and by the way, social security would not be bankrupt except for the looting of it by politicians of both stripes.

    See you in the next election.

  8. Submitted by Thomas Eckhardt on 11/21/2011 - 03:34 pm.

    Eric, I think Newt believes that the surge in the economy that will kick in when we get rid of the child labor laws will more than make up for any money taken from the Trust Fund for the transition costs. Chile, here we come.

  9. Submitted by Connie Sullivan on 11/21/2011 - 04:27 pm.

    Does anyone realize that about half of all retired women in this country rely almost entirely on their Social Security benefits to live? They don’t get much (their generation of women never really did get paid more than 70 cents on the dollar what men did when they were working, and of course a lot “stopped out” to have babies). To play around with the trust fund is obscene. I wish more voters were paying attention!

    Looting Social Security began in serious form in 2011: President Obama’s desperation to get some money out there to forestall the Big Money Boys’ recession from falling back again meant that he raided the contributions to Social Security this year: he cut one-third of what would have been contributed to the trust fund this year–the Boomers are still earning their top salaries!–and this has been lost to Social Security forever. So that consumers have several dollars more each pay check. We’re talking hundreds of millions of dollars gone, and I’ve seen the figure cited in billions, this year. And everybody is oohing and aaahing about how awful it will be NOT to fail to contribute even more in 2012.Do people not understand this?

    I don’t know what they’re doing for the future. If Social Security indeed is in trouble, beyond that Congress doesn’t have the money or the will to pay back what it’s already raided from the Trust Fund, how can underfunding it to this extent be sane?

    P.S. Not only did my generation NOT have the option of an IRA for most of our working years, there was nothing like a Roth. And when they did exist, for most years there was a cap on individual contributions of $2,000. Those of you who know money and taxes can gulp at the tens of thousands salaried people can put aside in tax-sheltered accounts today, that my generation was NOT permitted to do.

  10. Submitted by Ray Schoch on 11/21/2011 - 05:11 pm.

    Eliminating any form of social (“we’re all in this together”) insurance has been a signal goal of the radical right wing since the New Deal. What Mr. Tester and Mr. Swift would like us to return to is the antebellum 19th century, or perhaps Charles Dickens’ London, complete with poorhouses, orphanages, and even more beggars on streetcorners than we currently enjoy.

    What we hear from the radical right is the 3-year-old’s whine of “I don’t want to,” for which James Hamilton has already provided a suitable response in #3. If they and others like them really dislike Social Security so much, they’re free to exemplify that personal responsibility they take such pride in, save some extra cash each month, and put it into whatever kind of private retirement system they wish. If that means their kids can’t afford to go to the college of their choice, well, tough luck. Suck it up, boys.

    What neither seems to want to acknowledge is that they’re very much in the minority. The vast majority of Americans – idiots all, apparently, if right wing rhetoric is to be believed – think Social Security works just fine. It has significantly lower administrative costs than any private retirement fund of note, pays its modest benefits promptly, doesn’t need to pad the golden parachutes of investment bank and hedge fund executives, and – this bears repeating – was never intended to be the *only* source of income for retirees in the first place. That many people have come to view it that way, including those on the right, is a peculiar kind of American myopia. The exception to that myopia is… female. Women/widows have often had no other choice but to rely on Social Security to keep them from living under a bridge somewhere. Thanks to Connie Sullivan for reminding us. Just as there’s nothing to keep the Testers and Swifts from making other investments that might provide them with some retirement income, there’s nothing to keep others from doing the same thing – if they have the income to do so.

    Well… nothing except the fact that a good many of those “others” don’t have that income. They aren’t making enough money to be able to put aside a significant amount on a regular basis for a retirement that’s a long way off to someone in their 30s. If they’re already middle-aged, it’s often simply not possible to save enough privately to ever retire. For people of modest income, Social Security provides, at the very least, an economic “floor” upon which they can depend. Privatization schemes guarantee nothing, so their investors can similarly depend upon nothing.

    It’s also worth noting that the whole concept of “retirement” is very much an invention of modern industrial society. For many thousands of years, you worked until you died, or if you were too ill to work, you relied on family members to help you. If they didn’t, you died. It’s that concept of “screw you, I’ve got mine” with which the right wing is infatuated. If we follow their economic suggestions, arguments about retirement will simply be silly in a generation, not just because Social Security will have been eliminated, but because no one except that 1% will be wealthy enough to actually “retire.” At that point, we’ll have successfully migrated from the 20th century back to the 18th, and substituted aristocracy for democracy in the process.

    Thomas Eckhardt has a point – if we do away with child labor laws as Mr. Gingrich would like, the economy might recover – if you believe in that pixie dust. And of course, if all else fails, God will provide for some of us in the new, theocratic, United States. The parade of Republican clowns now campaigning for the presidency make George W. Bush look positively statesmanlike in comparison.

  11. Submitted by Paul Brandon on 11/21/2011 - 05:28 pm.

    Newt doesn’t believe anything except the fact that he’s going to retire on the millions of Federal dollars that he received for his historical advice.

  12. Submitted by Peder DeFor on 11/21/2011 - 07:20 pm.

    I don’t see the problem here. Over the last few months we’ve been told that bumping the tax rates on the wealthy ‘just a few points’ will solve almost any budget gap. We can just shake some of the pixie dust behind that ‘solution’ on this and voila, we’re there!

    And are we really in the situation where this needs to be overhauled in the next 25 years? Man, remember when 2036 seemed so far away that we didn’t need to worry about it? We need to get serious about this and right now. The current rates and retirement age schedule is simply untenable. Even the Simpson-Bowles plan had too slow a rate of increase for my taste. We should be bumping retirment age by six months every couple of years until it’s in the mid 70’s. (I turn 70 in 2043 so this would very much hit me too.)
    It is time, past time really, that we take these things seriously and fix them.

  13. Submitted by Rachel Kahler on 11/21/2011 - 07:33 pm.

    If the Chilean model worked so well, why have they changed it? And why have they had to contribute further government dollars to many of the accounts?

    Clearly you don’t have a 401k, or you’d know why we don’t expect to retire off them.

  14. Submitted by Dennis Wagner on 11/21/2011 - 08:50 pm.

    Reality #1 “The truth she hurts” no blaming the past or throwing pixie dust will solve the issue, “Those $ are spent” The solution we all know, but many “Refuse to admit” is:

    Door #1: Cut Benefits a lot = Recession
    Door #2: Pay back what has been borrowed (More revenue)economy grows (the receivers spend that money (because they are nearly all broke)
    Door #3: Some of doors #1 and #2

    Reality #2: The majority of Americans have little to no money to throw into the pot (like it or not it is reality) Why did Jesse James Rob banks? Because that’s where the $ is. Why do we have to tax the rich? Because that’s where the money is!

    Reality #3 “If we don’t hang together surely we will hang separately” I heard that somewhere.
    Now what is so hard to understand here?

  15. Submitted by Bill Gleason on 11/21/2011 - 09:32 pm.

    I see the Big Lie technique is alive and well – as exemplified by comment #5

    “The truth is that, today, according to the Social Security Administration, Social Security has a $2.7 trillion surplus and can pay out every benefit owed to every eligible American for the next 25 years.

    Further, because it is funded by the payroll tax and not the US Treasury, Social Security has not contributed one nickel to our deficit.”


    Continuing to make statements blatantly in disregard of the facts does not make them true.

  16. Submitted by Bernice Vetsch on 11/21/2011 - 09:53 pm.

    That good conservative Alan Greenspan helped Social Security arrive at the 1983 plan to grow the surplus so it would cover the Boomer generation when it retired, which is now in the process of doing.

    This surplus, in the form of bonds, is what George Bush called mere pieces of paper when he raided the trust fund to help pay for his wars against Iraq and “terror.” Future retirees have the same right to expect Social Security to be there when they retire as today’s do.

    I fully agree that Mr. Obama should not reduce Social Security’s revenue now or at any time. Instead, we should remove the cap on earnings so this program will be fully funded into perpetuity. As would Medicare/Medicaid.

  17. Submitted by Jeff Kline on 11/22/2011 - 05:04 am.

    Whenever I see something like the opening to this article of “pixie dust”; I’m thinking someone staunchly biased before they even started.

    In my read of this, I was not disappointed in that position.

  18. Submitted by Paul Udstrand on 11/22/2011 - 07:36 am.

    I started voting in 1980. I honestly can’t recall any Republican plans that didn’t rely on some kind of magic. Magic market’s, magic tax cuts, magic missiles, magic values, magic religion, magic magic magic. Of course all the while they were complaining about other people’s magic, Wiccan’s, Harry Potter,strange symbols on public television.

    The problem is that during what I like to call the Great Stupid (1979- present)and some other people like to call a fourth Great Awakening, too many non-Reublican’s drank the magic cool-aid. It’s gotten so bad that we are now talking about “evidence” based policy as if it’s lightening bolt of insight from who knows where. Think about that, for the first time in almost three decades we’re talking about making policy based on evidence rather than magic or ideology. I wish we could blame guys like Gingrich for that but the evidence tells us something else.

  19. Submitted by Dennis Tester on 11/22/2011 - 07:38 am.

    The problem with social security is the problem with all socialist plans – it’s mandatory. Ever notice how all collectivist plans, from the reason behind the Berlin Wall to Obamacare require mandatory participation or they don’t work? That’s antithetical to a free society.

    If people are really interested in an alternative, Google The Galveston Plan sometime. It’s about how 30 years ago the county employees in Galveston, Texas were given a choice whether they wanted to stay with social security or move to a private account retirement account system. The results are very interesting.

    The first feature in any republican plan on the table, including the Galveston Plan, is to give people a choice … something you will never get with any collectivists’ plan.

  20. Submitted by Paul Brandon on 11/22/2011 - 09:42 am.


    “• Galveston provides a higher initial retirement benefit than Social Security to single workers (without dependents who would qualify under Social Security) at the middle, high, and very high earnings levels, and to married
    workers at the very high earnings level. Social Security
    provides a higher initial retirement benefit to low- earning single workers and to married workers at the low, middle, and high earnings levels.
    Because Galveston’s benefits are not indexed to inflation, they lose value relative to Social Security’s benefits
    over time.”

    Note that this was written in 1999 — things would look even worse now. When you Google, it makes a difference whether you read the noted economist Glenn Beck in 2005, or someone with real credentials in the current situation.
    Overall, people retiring on equity based IRA’s right now are in a weak position relative to Social Security.

    Ponzi schemes are based on giving people seductive choices.

  21. Submitted by Paul Brandon on 11/22/2011 - 09:48 am.

    The main problem with Social Security is demographics: the retired are a larger proportion of the population than in the ’80s when SS was last tweaked. So it’s do for another tweak.
    As Bill, Paul U, Bernice (and probably others) have pointed out, these minor adjustments will be sufficient to keep SS solvent for another 30 years. If demographic indexing were built into the system, even this would not be necessary.

  22. Submitted by Dennis Tester on 11/22/2011 - 10:35 am.

    “The main problem with Social Security is demographics”

    You’re right. When the program first started in 1935 there were 16 workers for every recipient. Now there’s 3 workers for every recipient and it’ll soon be two.

    When it’s one worker per recipient, that’s one step from official Ponzi status. Then what do you do?

  23. Submitted by Bill Gleason on 11/22/2011 - 11:49 am.

    “it’ll soon be two.” Cough, cough, Dennis. And when will that be?

    Answer: 2032.

    And how to fix that: increase payroll tax from current capped figure – 108K.

    Sanders payroll tax proposal would ensure that Social Security pays out 100 percent of benefits and is sustainable for, as he put it, “another 75 years.”


    By the way, it is amusing that Swiftee claims Social security was a Ponzi scheme in FDR’s time and Mr. Tester claims that this will happen when there is one worker per SS recipient.

    Why don’t you folks start singing from the same hymnal?

    Because Social Security never was a Ponzi scheme?

  24. Submitted by Dennis Tester on 11/22/2011 - 12:48 pm.

    Swift’s argument is that anyone who passed 5th grade math could see that the model was unsustainable. I simply defined exactly when the model fails.

  25. Submitted by Gerald Abrahamson on 11/22/2011 - 01:07 pm.

    Tester makes a wide range of errors.

    1. *Extended* failed US economy–from 2001 to present (for all but a few years), the US economy (and job creation) has failed to grow at normal/historic rates. Normal slow periods do happen–and are expected. But NOT for *extended* periods of time. Usually there is a short slow period, then a fast rebound within 9-18 mo) and the losses are more than made up. This was the historic pattern 1971-2000 and there is no logical reason it would just “stop” in 2001.

    2. Due to that *extended* failed economy, jobs and job creation in the US economy–and the taxes collected from such jobs–have been sub-normal. Ballpark $20T of “less than normal” economic activity from 2001-2008. 16% (total SS rate) of $10T (wages NOT paid over eight years due to to lack of jobs created–the other $10T is for non-wage goods) is $1.6T in SS taxes NOT collected ($200B/year for eight straight years).

    3. Interest rates have been significantly depressed for an extended period as well. Which means the revenue received by the SSTF is less than expected–dramatically so. Again, billion and billions NOT received over an extended period of time means it is not available to be paid out and can not reasonably be “made up” with future gains from other sources (where?).

  26. Submitted by Bill Gleason on 11/22/2011 - 01:46 pm.

    “Swift’s argument is that anyone who passed 5th grade math could see that the model was unsustainable.”

    Absurd Dennis. And so it lasted 75 years? How can you and Swiftee expect to be taken seriously?

    And the program is sustainable for another 75 yrs if appropriate steps are taken as demonstrated above.

    People are getting tired of the “no solution” solution of the GOP.

    Calling something a Ponzi scheme is not going to make it go away. You and Swiftee live in a dream world.

  27. Submitted by Paul Brandon on 11/22/2011 - 05:21 pm.

    Ah, but it’s THEIR dream world.

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