Investment Company Institute

Investment Company Institute
1401 H STREET, NW
WASHINGTON, DC 20005-2148
202-326-5800

Statement on Social Security Reform
December 3, 1998
The Investment Company Institute is the national association of the American investment company industry. Its mutual fund members have assets of about $4.5 trillion, accounting for approximately 95% of total industry assets, and have over 62 million shareholders. About 35% of these assets under management are held in retirement savings vehicles, including Individual Retirement Accounts (IRAs), 403(b) accounts and 401(k) plans.
The nation's retirement income policy rests on three programs - the Social Security system, individual savings (including traditional and Roth IRAs) and employer-sponsored retirement plans. These programs are designed to work in concert to enable Americans to enjoy a reasonable standard of living in retirement. Lawmakers should continue this three-pillar approach, ensure that each program continues to be effective and consider ways to increase the effectiveness and reach of each program. Assuring that Americans have available all necessary tools and avenues to save for their retirement is especially important in light of our nation's changing demographic profile. As a result of increases in longevity coupled with the aging of the baby boom generation, it is vital that the retirement needs of the population be adequately addressed.
The number one goal of lawmakers should be to ensure the long-term health of Social Security. The program's status as a universal system should be maintained, because it assures a floor benefit to the many Americans who have not had the benefit of an employer-sponsored retirement plan nor the ability to accrue substantial individual savings. Moreover, the restoration of fiscal soundness and fairness will renew Americans' faith and support of the program.
Many Social Security reform proposals would include an "individual savings account" component. Among the reasons offered in support of such an approach are that it would (1) increase the benefit the system could deliver to many individuals, and (2) introduce many individuals to the basic principles of savings and investing, which could have positive effects on the two remaining retirement income program -- individual savings and employer-sponsored plans.
If lawmakers determine that individual accounts contribute to the overall fiscal stability of the Social Security system and to improved retirement income and thus includes them as part of Social Security reform, they also should ensure that appropriate investor protections, similar to those found in the securities laws, are put in place. In addition, many participants in the Social Security system may have little or no experience with long-term investing. Thus, the creation of an individual account program needs to be preceded and accompanied by a significant public education campaign about the principles of investing, markets and risks, and product disclosure.
To assure an orderly transition to a new system, all individuals upon entering the system should first have their individual accounts invested in a government-sponsored fund or funds. [1] At some designated point in time, however, individuals should be given the option of electing investments in addition to government-run funds. [2] There are several reasons why this is an important feature. First, and perhaps most importantly, the additional choices will enable participants to select investments that meet their own objectives, taking into account factors such as age, income, and risk tolerance. Second, in the absence of such an option, government-managed pools quickly would become extremely large and, as a result, have unintended impact on the markets. Third, private managers would compete against the government funds on cost, performance and service, thus improving the system. Fourth, many private managers already have well-established infrastructure to handle similar accounts. It is important that the system be designed at the outset to accommodate privately managed accounts and that additional legislative or regulatory action not be required to permit them as options.
Finally, in considering Social Security reform in the context of improving retirement security, lawmakers also should assure that the other retirement programs are expanded and the rules governing them are simplified. The success of these programs, such as IRAs and employer-sponsored plans, will reduce the strains placed on Social Security. Enhancing these programs would be even more important if lawmakers determine not to establish an individual account component to Social Security.

1 Such a system, might, for instance, be modeled upon the Federal Thrift Savings Plan, which offers a limited number of government-managed investment options.
2 Such an option could be made available after, for example, an individual has participated in the system for a specified number of years, has worked for a specific number of consecutive quarters, or has accumulated a specific minimum dollar amount in his or her account.