Briefing Book

White House Conference

National Commission on Retirement Policy CSIS 1800 K Street, NW, Suite 400 Washington, DC 20006 202/887-0200 FAX: 202/775-3199 www.csis.org/retire/ ENSURING RETIREMENT SECURITY IN THE 21st CENTURY Statement of Bradley D. Belt CSIS Vice President Executive Director, CSIS National Commission on Retirement Policy White House Social Security Conference December 8, 1998 The National Commission on Retirement Policy (NCRP), a blue-ribbon panel of key members of Congress from both parties, business leaders, and policy experts convened by the Center for Strategic and International Studies, earlier this year released its bipartisan 21st Century Retirement Security Plan. This benchmark proposal would modernize the Social Security system while strengthening the private pension system and enhancing personal saving opportunities. It would ensure the solvency of Social Security without raising taxes. The centerpiece of the plan is the establishment of individual security accounts, which would be funded by diverting 2 percent of current payroll taxes into individually owned, collectively managed accounts. Modeled on the successful Thrift Savings Plan for federal employees, participants would be able to invest in three broadly based index funds--an equity fund, a fixed-income fund, and a government securities fund--depending on their individual investment objectives and risk tolerance. Restructuring the Social Security system in this way would give Americans greater control over their own financial destinies and would enable them to achieve higher rates of return on their Social Security contributions. In fact, a new CRS Report finds that the NCRP plan not only would ensure the long-term solvency of the Social Security system, it would provide substantially higher benefits than the current system (on a funded basis) or alternative plans, such as those that would have Social Security directly invest funds in the stock market. Unfortunately, there are those who want to make political hay out of Social Security rather than save it. They would deny average Americans the opportunity to accumulate real wealth and break the cycle of dependency on government. They want to confuse rather than inform, by making spurious arguments against individual accounts. One such criticism is that it is too risky to invest Social Security in the stock market. This is a canard for several reasons. First, the current system is risky. Benefits aren't guaranteed and can be reduced or taken away by legislative fiat. Second, investing strictly in treasury bills may be safe, but earnings likely will be insufficient to meet retirement needs. Also, market risk is spread over a person's career. There is no 40-year period in American history in which equities have not substantially outperformed treasury securities. But under the NCRP plan, those who are risk-averse can put their money in bonds or treasury bill funds. Moreover, because the funds would be collectively managed, selling abuses by brokers, a concern expressed by SEC Chairman Levitt, would not be an issue. Most importantly, the proposal would strengthen the safety net for the most vulnerable in our society by offering at least a poverty-level benefit to career workers. The NCRP proposal to gradually raise the eligibility age for full Social Security benefits is another favorite target of critics. This is necessary to reign in costs and is sound public policy because it reflects the fact that people are leading longer lives. When Social Security was created, the average life expectancy was just 63 years. The average worker was expected to die before he or she could collect a dime. Average lifespans are expected to be about 80 years in 2030, so an indexed adjustment would suggest a normal retirement age of 83. The most specious argument is that a system of accounts for 140 million workers is too administratively complex to implement. There are legitimate issues as to what is the most effective and efficient system that imposes the fewest burdens on employers and participants. But to suggest that it can't be done is, frankly, ridiculous. A bit of historical perspective is in order. When Social Security was created in the 1930s for the then 40 million workers, the only tools available to designers were pencil, paper, adding machines, and the mails. They had no model to follow. Today we have powerful computers, advanced telecommunications, and a variety of tested models for guidance. As noted, the NCRP plan is based upon the Thrift Savings Plan for federal employees. The TSP costs are less than ten basis points. We can make this work. And we should. Under the leadership of Sens. Judd Gregg (R-N.H.) and John Breaux (D-La.), Reps. Jim Kolbe (R-Ariz.) and Charles Stenholm (D-Tex.); Donald B. Marron, chairman of PaineWebber; and Dr. Charles Sanders, retired chairman of Glaxo, the commission achieved what is most needed as Washington puts retirement security at the top of the agenda in 1999: a fiscally responsible, practically achievable and politically viable plan to address the retirement financing challenges each American faces.