(MONEY Magazine) – In a democracy, any group that claims to represent extraordinary numbers merits close scrutiny. By that standard, then, the American Association of Retired Persons deserves to be one of the most carefully monitored organizations in our society. With rolls of 30 million, AARP is the second largest membership group in the nation. The Roman Catholic Church is still first, with 53 million, but AARP is catching up. It will have added 170 members, some of whom are not retired or even seniors (anyone over 50 and his spouse can join), by the time you have finished reading this MONEY special report. Among AARP's growing army are nearly one in every five voters, a fact lost on few campaigners in this election year. Indeed, AARP has become in many minds the enforcer of an insatiable and all but invincible gray lobby. For apart from the crush of its numbers, AARP also draws on a seemingly bottomless political war chest. Keeping those coffers filled is the task of a tax-exempt retail empire of awesome proportions. AARP Group Health Insurance Program is the nation's largest of its type. AARP Pharmacy Service is the No. 2 private mail-order prescription outlet. Modern Maturity, AARP's glossy bimonthly mouthpiece, has the highest average circulation of any magazine, including TV Guide. Under its halo as a nonprofit social-welfare organization, AARP lends its name to eight businesses that last year generated cash flows of about $10 billion. AARP's net was $106 million, and ads in AARP publications added another $34 million. Together that produces almost 60% of its total budget of $236 million. Many members assume that because of the economies of scale AARP can bring to an enterprise, and because of its presumably purer motives as a nonprofit organization, AARP will always offer terrific deals. AARP's advertising reinforces this assumption. A typical marketing brochure for the AARP homeowners insurance program proclaims: ''With our low rates and special discounts, your savings could easily reach up to 25% or more!'' MONEY has put such promises to the test by comparing AARP's offerings with the competition. With help from 10 correspondents across the country, we also examined the operations and business practices of the organization. During a four-month investigation, we reviewed thousands of pages of documents and interviewed scores of people who have observed AARP from both the inside and the outside. We discovered a loosely knit and paradoxical group, neither as politically threatening as it is often perceived nor as benign as it portrays itself to members. On the one hand, it is a high-minded service group that enables 400,000 elderly volunteers to donate their services to their communities; at the same time, it is a well-greased marketing machine designed to sell those volunteers and other AARP members a battery of sometimes mediocre products and services (see the analysis beginning on page 148). It is also an undeniably effective lobby -- and yet its membership is so fragmented and random that it lacks a specific shared interest or philosophy. To understand what really moves AARP, consider why members join: for irresistibly low annual dues of $5, they get a subscription to Modern Maturity and the monthly newspaper AARP News Bulletin; they also automatically qualify for discounts of 5% to 25% on Hertz, Avis and National car rentals and cut- rate hotel rooms from major chains such as Holiday Inn and Sheraton. As one recruiting come-on accurately promises, ''You can save the cost of membership many times over by using just one of the services AARP offers you.'' This is certainly persuasive bait, but it hooks bargain hunters, not political activists. What then does AARP really stand for? Jack Ossofsky, the longtime president of the National Council on the Aging, a group of some 7,000 organizations helping the elderly, recalls early this year challenging a top-ranking AARP staff member to define AARP's ideology. The reply: ''Our ideology is 'big.' ''

AARP STAGES A CONVENTION The best place to sense the magnitude and meaning of AARP is at its biennial convention. The most recent extravaganza took place last May in Detroit's Cobo Hall. Some 25,000 AARP members came, lured in part by lecturers like Ralph Nader and Dr. Ruth and concerts featuring Sarah Vaughan and Tony Bennett. Between events, members wandered among 175 booths, 25 of them AARP's, in the sprawling exhibition hall. In one elaborate exhibit, a stage set of a Norman Rockwell-style village called Hometown U.S.A., AARP volunteers explained their 15 laudable civic- minded programs, ranging from refresher courses in defensive driving to free tax-return preparation. A few feet away, under a miniature red, white and blue hot-air balloon, young men and women handed out brochures for the AARP health plan, mutual funds, and homeowners and auto insurance, as well as free sample containers of shampoo and vitamins, courtesy of the AARP mail-order pharmacy. Visitors left the convention with tote bags of freebies and imbued with an image of AARP as a generous, protective uncle who sincerely wishes them well -- and also hopes that they will buy his insurance.

AARP the advocate and AARP the salesman are both firmly embedded in the association's origins. In 1958, Ethel Percy Andrus, a crusading 72-year-old retired high school principal from Los Angeles, created the group to ''promote independence, dignity and purpose'' among the elderly. But the $50,000 seed money to launch AARP came from Leonard Davis, a go-getting, 32-year-old Poughkeepsie, N.Y. insurance broker. At the time, most health insurers refused to sell policies to anyone over 65, but Davis convinced Continental Casualty of Chicago to take a risk by covering Andrus' group. AARP became a way for the elderly to buy health insurance; for Davis it was a doorway to a potentially vast, untapped market. The new association proved immediately popular. As membership swelled to 750,000 by 1963, Davis was emboldened to found his own insurance company, Colonial Penn, which replaced Continental as AARP's insurer. A dozen years later, the rolls stood at 10 million and Davis' company was taking in revenues of $445 million, the bulk of it from AARP. His $50,000 flier had turned into a personal fortune exceeding $160 million. By the mid-1970s, however, other companies had started selling health insurance for the elderly. Colonial Penn, with its cozy captive market, was no longer competitive. Indeed, in 1976 a scathing Consumer Reports study concluded that Colonial Penn's Medicare supplement policy offered the least protection of 16 examined. Worse publicity followed. In 1978, AARP fired its executive director, Harriet Miller, citing ''differences of policy and management practices.'' Miller then sued Colonial Penn, Davis and Davis' lawyers for allegedly causing her dismissal. She charged that Davis and his cronies dominated the AARP board and had turned the association into ''a convenient and effective cover'' for enriching Davis by selling overpriced insurance. (Shortly before the scheduled trial in 1980, Davis and his co-defendants settled, giving Miller $480,000.) To this day, AARP leaders deny that Colonial Penn's insurance was a bad deal. Cyril Brickfield, Harriet Miller's successor as executive director, recently ^ told MONEY: ''The elderly aren't ignorant. If the policy hadn't been competitive, they wouldn't have bought it.'' Nevertheless, as bad press continued to mount -- and membership growth began to stall -- AARP decided to open up its insurance operation to bids from other companies. Prudential took over as the underwriter for health insurance, and all of AARP's business partners have since won their endorsements in a similar open competition. But in broad terms, AARP continues to follow the expansionist strategy of the formative Davis era. Leonard Hansen, editor of the San Diego news service, Mature Life Features, who has followed AARP since the early '70s, calls it ''the slickest mass-marketing scheme I've ever seen.''

Low dues bring prospects through the door, and the direct-mail maestros move in from there. AARP -- which knows the names and addresses of more Americans than any other comparable organization in the U.S. -- accounted for as much as 1.5% of the nonprofit third-class mail delivered last year. The volume of incoming mail is so massive that AARP has its own zip code: 20049. Some members report getting three pitch letters a month for AARP's health insurance alone. The sell is a bit too hard for some. Mark Gilbert, 74, of Durham, N.C., quit AARP last year after eight years. ''They were always pushing some tour or insurance policy,'' he says. ''Every week some fat packet would arrive promoting something. The insistence got to me.'' The second wave in the marketing blitz is Modern Maturity and the AARP News Bulletin. In the most recent Modern Maturity, AARP and its commercial partners accounted for 35% of the paid advertising pages. (AARP also airs Modern Maturity Television, a weekly public-affairs show carried on 270 PBS channels.) Competing companies are not allowed to buy space in AARP publications, so members never find ads for any mutual funds, health insurance or mail-order pharmacy services other than AARP's own. And despite a consumerist bent to many of AARP's lobbying efforts, Modern Maturity publishing director Robert Wood says he cannot recall ever printing comparison-shopping articles that mentioned competitors. Says Wood: ''We aren't Consumer Reports.'' AARP's other major marketing advantage is its nonprofit status. This does not mean that AARP cannot make money but rather that any earnings -- called ''excess revenues'' in nonprofit accounting jargon -- must be spent to further the purposes of the association. AARP's lawyers carefully construct each business agreement to ensure that no matter how great the proceeds to AARP, they remain tax-free. In recent years, large financial companies paid an average of 6.2% of their revenues in federal income taxes; applied to AARP's business revenues, that percentage could yield taxes of more than $9 million. Instead, AARP paid no federal income taxes at all last year. The Internal Revenue Service generally allows a tax-exempt organization to avoid taxes on business income as long as the business is ''substantially related'' to the group's founding purpose. That permits AARP to keep a tax- free 4% ''administrative allowance'' for collecting health insurance premiums and forwarding them to Prudential. Last year that fee came to $67 million. The tax exemption also applies to whatever interest the premiums earn while in AARP's possession -- $15 million in 1987. In its other businesses AARP typically receives a percentage of its partners' gross revenues as royalties, which do not usually trigger any taxes for tax-exempt groups. The association last year brought in another $30 million tax-free this way. (That includes a small amount from the sale of 32 educational books, co-published by AARP and Scott Foresman & Co., which, like MONEY, is owned by Time Inc.) This strategy could be in jeopardy, however; a House Ways and Means subcommittee is expected to recommend that the tax break for royalty income be repealed. AARP's nonprofit status qualifies its mailings for cut-rate postage. On average, AARP can churn out 74% more mail for the dollar than a for-profit, bulk-rate firm. The nonprofit postal rate is so low that the Postal Service loses an estimated $14 million a year serving AARP, a deficit made up by U.S. taxpayers. Less tangibly, nonprofit status lends AARP the aura of a charitable organization with purer motives than those of its competitors. As a result, AARP tends to inspire uncritical trust among its members. Paul Kerschner, AARP's chief lobbyist from 1978 to 1983, recalls: ''The staff used to joke that the easiest way to become a millionaire would be to take out an ad in Modern Maturity saying, 'AARP wants you to send me $100.' '' Many AARP officials, like AARP members, tend to believe that their association holds to a higher standard than conventional corporations. Says former executive director Brickfield: ''AARP enters its ((commercial)) programs only after determining that they will be of special value to % members.'' But it is not always possible to identify any special value to AARP's programs. In some cases, in fact, more efficient for-profit competitors offer comparable services at lower prices. Nevertheless, AARP is unlikely to pull out of these programs. Even if the association were willing to forgo the income they produce, it is still bound by contracts with its business partners to continue offering all of its products, the mediocre as well as the excellent.

WHO RUNS AARP? Two echelons of leaders preside over this sprawling empire. Day-to-day management comes from a paid staff of 1,300 (average age: 41), headed since January by executive director Horace Deets, 50, a former Jesuit priest. Deets' staff reports to the second layer, a 15-member board of directors and six national officers, all unpaid AARP volunteers from across the country. These 21 volunteer leaders are generally retirees who rose through AARP's ranks, proving their dedication first as instructors in programs such as driver education and later as AARP regional administrators. The busiest of these volunteers spend about two weeks a month on AARP affairs. They make ceremonial appearances at political functions, and they sometimes testify before Congress on issues relating to the elderly. But their main job is attending AARP's quarterly board meetings and sitting on the various committees that oversee its commercial enterprises, lobbying efforts and volunteer programs. Though not lavish by corporate standards, AARP sees that its employees live well. Headquarters are an eight-story marble-fronted building on K Street in the heart of Washington's influence mongers. There is no ornate executive dining room, but AARP officials enjoy capacious expense accounts and substantial salaries. Executive director Deets earns an estimated $200,000, which is at the high end of the range for top employees at large Washington nonprofit groups, according to a survey by the benefits consulting firm TPF&C. In the AARP bylaws, supreme authority rests with the board of directors. In reality, the executive director and paid staffers tend to call the shots. They, after all, are more familiar with AARP's operations and often have keener business training and political savvy. In recent years, the board was particularly in the thrall of Cyril Brickfield, the smooth lawyer who retired last October after 10 years as executive director and now, at 69, is chairman of AARP's new credit union. ''When Cy was in office, the executive director ran the board, not the other way around,'' says a knowledgeable former insider. That all changed briefly under Brickfield's successor, Jack Carlson, 54, an ex-fighter pilot who had previously run the National Association of Realtors. Carlson's aggressive style clashed with AARP's genteel modus operandi, and the board asked for -- and got -- Carlson's resignation 15 weeks after hiring him. Two of the most influential people at AARP are neither staffers nor volunteers, but rather the group's chief legal advisers -- and Brickfield's former law partners -- Alfred Miller, 60, and Lloyd Singer, 59. Miller and Singer have remained closely associated with AARP since 1971, when they formed their New York City law firm -- now called Miller Singer Raives & Brandes -- specifically to provide legal counsel for AARP. In the late '60s, Singer was chairman of AARP's insurer, Colonial Penn, and as general counsel to AARP, the lawyers kept their old ties. From 1974 to 1978, the two lawyers arranged for Colonial Penn to pay more than $1.5 million of the legal fees AARP owed them in connection with the group insurance program. Today, Miller and Singer are still key decision makers for AARP. One or the other monitors most committee meetings involving AARP enterprises. They also generally attend sessions of the executive committee charged with hiring the executive director and overseeing the paid staff. ''They have the most pervasive influence of outside counsel I have ever seen in any association of any size,'' says deposed executive director Carlson. They are also well paid: in the 12 months to mid-1986, the firm billed AARP for almost $1.1 million.

AARP vehemently denies that the lawyers have inordinate power. ''They do not run the organization,'' says AARP's top volunteer officer, president Louise Crooks, 76, a former teacher from West Lafayette, Ind. But Miller admits that his firm's advice goes beyond strictly legal matters. ''AARP's leaders want and respect advice on technical issues on which they have no expertise,'' he explains. Though even the lawyers' critics accuse them only of filling a leadership vacuum, for a volunteer social-welfare organization, AARP seems to rely excessively on advisers whose income depends, at least in part, on ever- increasing membership and revenue growth. ''The problem,'' says Carlson, ''is not that the lawyers are unreasonable. It's that they have no countervailing force.''

HOW AARP LOBBIES On Capitol Hill, AARP's size is both a strength and a weakness. On the one hand, the fact that AARP has the ear of 30 million citizens guarantees its lobbyists access that few other groups command. But because of the diversity of political views of its membership, AARP lacks the shared conviction that gives clout to more ideological lobbying groups. Says Henry Pratt, a professor of political science at Wayne State University and a 20-year observer of the gray lobby: ''AARP overwhelmingly has clients, not followers.'' A mere 4% of the members have joined one of the 3,900 local chapters. Many participate to do good: Millie Moe of Minneapolis, for example, organized her local chapter to make condolence calls to members who are widowed. Others meet mainly for potluck dinners and picnics. Evelyn Springstead, AARP's Vermont director, complains: ''One of our weaknesses is the apathy of many people who join. They want the magazines and the discounts but they really don't want to take on responsibilities.'' As for grass-roots involvement, AARP does poll its members periodically on broad policy positions. In 1987, for example, AARP mailed 8,700 questionnaires to a national sample of its local leaders and randomly selected rank-and-file members. The questionnaires requested multiple-choice answers on five to nine issues. By contrast, AARP's 308-page legislative manual takes detailed stands on about 75 issues. Says one former staffer: ''To say the legislative agenda is set by the membership is just foolish.'' The actual task of determining political priorities falls to a committee of 40 AARP volunteers from across the country who meet with the paid staff at headquarters one week a year. Policy positions are heavily influenced by the staff professionals -- most not old enough to join AARP themselves. Top dog is John Rother, 41, an astute political player recruited from the Senate Special Committee on Aging who directs efforts of 18 registered lobbyists and 103 other employees. AARP lobbyists in each state, all volunteers, determine their own local priorities, but these must agree with guidelines laid down by headquarters. This does not sit well with all AARP members. John Enders, 62, a retired teacher from Seattle, was angered by AARP's opposition last fall to a proposed state law that would have limited the size of doctors' bills for Medicare patients. ''AARP operates from the top down,'' he complains. ''The membership has no say in anything that happens.'' AARP legislative leaders do interpret their mandate extremely broadly. ''Our role is to be advocates for a better society as regards aging,'' says chief lobbyist Rother, ''and to keep in mind that aging is not all that is going on in our society.'' This vague mission translates into a position straddling the gray lobby's political spectrum. AARP staunchly defends the concept of social insurance -- that working generations should be taxed to provide Social Security and Medicare for the elderly -- and strongly opposes any effort to reduce payments to wealthy seniors. AARP has also successfully fought for a number of consumer issues such as assuring pension benefits for older employees and allowing department stores and drugstores to sell nonprescription glasses. At the same time, AARP tempers its stands with an acute sense of what is politically and fiscally feasible. For instance, AARP takes a conservative position on the issue of the so-called Social Security notch. This refers to a technical glitch in the law that causes Americans born between 1916 and 1921 to receive smaller benefits than older retirees. More militant senior groups demand that the ''notch babies'' be given a boost in benefits -- and 60% of AARP members in a 1987 poll agreed. But AARP opposes filling the notch because its lobbyists realize the change could cost up to $88 billion, too rich for Congress. To avoid offending its diverse constituency, AARP forsakes some of the most potent levers of political clout. AARP does not endorse or oppose any particular candidate. It does not have a political action committee -- the powerful financial bludgeon of campaigning in the '80s. It does not promulgate ''report cards'' of politicians' voting records on elderly issues. By contrast, the feistier, 4.5 million-member National Council of Senior Citizens publishes politicians' voting records and rewards compliant candidates with campaign contributions: $200,000 alone in the 1988 national elections. In 1984, AARP pondered establishing a political action committee, only to reconsider. Explains one former AARP official involved in the discussions: ''If AARP was going to ask people to contribute money for a PAC, those people would be very interested in how well their views were represented. AARP was concerned that the fragmentation and diffuseness of membership would really begin to show.'' As a compromise, the group decided to create AARP/ Vote, an $8 million, nonpartisan voter-education project. AARP/Vote made a / noisy national debut in the Iowa and New Hampshire presidential primaries last winter. At the time, AARP/Vote got great press as about 200 volunteers made more than 100,000 phone calls to bring out elderly voters. They also distributed a 15-page booklet called AARP/Vote Presidential Voter's Guide comparing AARP's stand on eight issues with that of each candidate. Yet for all the fanfare, AARP/Vote had little effect on the outcome of the primaries. ''What limits their power is that they are strictly nonpartisan,'' notes Paul Furiga, issues director for Senator Paul Simon's Democratic presidential campaign. Power in Washington, however, takes many forms, and what AARP's lobby lacks in partisan fervor, it makes up for in savvy and wealth. Together they have earned AARP credibility and impact on issues far beyond that of more homogeneous ideological groups. AARP most effectively combines its war chest and expertise in its research arm, the Public Policy Institute. In today's deficit-obsessed Capitol, congressional debates often hinge on arcane cost- benefit analyses, and the side with the most believable research usually wins. Congressional staff members rate AARP's data as consistently among the most persuasive around. Says an informed analyst at the Congressional Budget Office: ''Like any lobbying group, they generate research showing whatever they want to prove. But their methods are sound, and sometimes theirs is the only data in its field.'' Take, for example, the debate last spring on whether the proposed expansion of Medicare for catastrophic health coverage should also include reimbursement for prescription drugs, as AARP favored. No one knew how much this benefit would cost. Guesstimates ranged from $2 billion to $7 billion over five years. But by extrapolating sales figures from its own pharmacy operation, AARP substantiated the lower-end estimate. The Budget Office accepted the numbers, which helped convince congressional fence-sitters that the drug coverage was affordable. The law passed. Critics have suggested that AARP's hard lobbying was intended partly to help build sales for its pharmacy. But MONEY's investigation found little supporting evidence. In fact, AARP could wind up a net loser because the legislation might slacken sales of AARP's Medigap health insurance policies, now less essential than before the law was passed. AARP has masterfully wielded a combination of research, money and hype to promote its top legislative priority: government funding for long-term ^ nursing-home and home health care. Since sponsoring a poll showing broad national support for the issue, AARP, together with the private Villers Foundation, has led a successful $2 million effort to make long-term care a political bandwagon. During the Iowa presidential caucuses last January, AARP and Villers thrust the issue into the national spotlight by, among other things, offering free television time to candidates willing to address the issue. Everyone still in the race at that point accepted AARP's invitation. Both Michael Dukakis and George Bush included planks supporting long-term care in their presidential platforms. Ever the pragmatic organization, AARP also knows when to stop fighting. Observes Don Carlson, administrative assistant to Texas Representative Bill Archer, who is the ranking Republican member on the House Subcommittee on Social Security: ''They pick their fights well.'' Sometimes, as a result, AARP will back away from a losing cause even if it is strongly favored by the elderly. For example, AARP angered some of its constituency by not strongly pushing a bill introduced last May by Florida Democratic Congressman Claude Pepper, the 88-year-old godfather of the Social Security set, that would have paid for home health care. Lobbyist Rother says Pepper's bill needed ''some fixes'' but denies that AARP was lukewarm in its support. ''We did a lot of education and grass-roots organizing that will be helpful in similar legislation next year,'' he says. For AARP believers, the association's presence can only grow, particularly as the mammoth baby-boom generation eventually moves into retirement. ''We have increased nearly 50% in the past three years,'' gloats John Denning, 76, a retired North Carolina school superintendent and former AARP president. ''We must be doing something right.'' But in fact, AARP and the gray caucus as a whole may be reaching the end of their glory days -- a victim of their own success at improving the elderly's standard of living. Indeed, with the likely passage of some kind of long-term- care legislation during the next Administration, the senior lobby could reach its high-water mark. Americans over age 65 now receive 27% of the federal budget, compared with 14% in 1960. They also have a lower poverty rate, more disposable income and better access to health care than the population as a whole. AARP is in the paradoxical position of arguing before Congress that the elderly are too poor to be taxed more on Social Security benefits while boasting to advertisers that the average net worth of Modern Maturity readers is higher than $159,000. There is a growing perception in Washington that it is time for the nation to move on to other battles. One sign of the new times, ironically, may have been AARP's biggest legislative triumph of 1988, the passage of the Medicare Catastrophic Protection Act. This was the most generous expansion of Medicare coverage since the program began in 1965. But for the first time, Medicare beneficiaries -- instead of all taxpayers -- will bear the full cost of the improved benefits. Because of this provision, AARP's support for the bill led to scattered rebellions among AARP's membership. C. Colburn Hardy, 78, for example, a former AARP state legislative volunteer in Florida, led a renegade campaign to convince his state's congressmen to vote against the bill. Says Hardy: ''AARP wasn't speaking for us and we wanted to make that clear.'' Moreover, when the baby boomers do retire, they are unlikely to turn AARP into an 80 million-strong voting bloc. In fact, they may only further dilute the group's political voice. By the year 2015, 46% of the adult population will be eligible for membership. Politicians are unlikely to regard nearly half the voting population as a special-interest group. Continued membership growth could also diminish the value of some of AARP's special deals. After all, no company can grant a discount to half the population; at some point, that becomes the standard rate. AARP could also find that the baby boomers might not be the joiners their parents are. Raised in an era of financial self-reliance, baby boomers are less likely to rely on the goodwill of any organization to look out for them. Nor are they likely to organize their social or political lives around senior citizenship. Says Robert Hudson, professor of social-welfare policy at Boston University: ''The needs of the elderly aren't specialized needs anymore. They're the needs of society.''

BOX: For the Record Who is AARP? Average age: 66 Non-elderly (ages 50 to 65): 38% Fully employed: 21% Fully retired: 54% Women: 53% Men: 47% Median household income: $22,400 Net worth above $150,000: 39%

Percent of registered voters: about 20% Percent of New Hampshire delegates at Republican convention who were AARP members: 35%

Local AARP chapters in 1976: 2,500 1988: 3,900

HOW AARP HAS GROWN Apart from a bumpy period in the late '70s, AARP's rolls have risen rapidly each year since its founding in 1958. 1958 50,000 1968 1.6 million 1978 11.8 million 1988 30 million

CHART: NOT AVAILABLE CREDIT: NO CREDIT CAPTION: Where AARP gets its money...and spends it DESCRIPTION: Percentage of income and outgo of American Association of Retired Persons funds.