Follow-up To Previous Questions

[National Dialogue Moderator <moderator>]

     To the panel and participants:

Unfortunately there have been some technical difficulties that have
prevented my previous messages to the panel from being posted.
Yesterday morning, I composed a lengthy reply to the inquiries made
by Mr. Ridgeway and Mr. Hart, and I understand that an exhaustive
search through cyberspace is ongoing to find it.  Not yet knowing
whether it will be recovered, I am somewhat reluctant to repeat
the entirety of its contents here. However, I do wish to continue
to respond to the questions that have been posted, and some repetition
of the previous message's contents will be necessary as a consequence.
I trust that the panel will be forgiving if space and time do not
permit my responding to every detail of every question.

[Moderator's Note: The search has been successful, thanks to some 
swift work on the part of the support staff in Senator Gregg's
office.  The missing message will be posted following this one.]

Examinations of the fairness of the Social Security system must
take into account the entirety of the revenues and benefits that
individuals contribute and receive from the system.  Though it is
well understood that rates of returns for individuals are declining
for more recent birth years, these figures understate the true
level of deterioration because they measure only the relationship
between benefits provided, and payroll taxes contributed.  Beginning
in 2014, a small but rapidly increasing portion of the system's
benefits will be financed, under current law, through general
revenue outlays.  By the year 2030, these outlays will be of a size
that is equivealent to approximately 5 percentage points of national
taxable payroll.  This is a consequence of Social Security's "pay
as you go" structure, in which no advance funding is possible,
because all surplus Social Security taxes must by law be invested
in federal government securities, which underwrite current federal
government consumption.  Consequently, in the years when the program
enters annual financing deficits, the gaps between revenues and
outlays are met by raising money from the general revenues of the
federal government -- in other words, from the taxpayer.

One thing that has united analysts from across the political spectrum
(one of the few recommendations on which a divided Social Security
Advisory Council was to unify) was that some advance funding was
necessary in order to spare future generations the burden of being
assessed with enormous and unfair tax levels.  The cost of the
current OASDI system is projected to rise from approximately 12%
of national payroll today, to approximately 18% in 30 years, an
increase of roughly 50%.  The fact that this tax increase would be
expressed largely through general revenue outlays as opposed to
payroll tax increases (which would not be necessitated until 2034)
does not change the reality of the burden upon the workers of
tomorrow.  The only way to lessen this burden upon future taxpayers
is to move part of those liabilities into the present, by incorporating
some advance funding into the system.

It is important to understand how the Trust Fund "works."  The
system could be made "actuarially sound" by simply decreeing that
trillions in new debts are to be credited to the Social Security
Trust Fund.  If we sign a law tomorrow adding $10 trillion in IOUs
to the Trust Fund, then it will be officially "actuarially sound."
And, of course, we would have accomplished nothing other than to
give the system statutory authority to call in larger debts, and
to state overtly that future generations will simply be taxed as
is necessary to meet the system's pay-as-you-go liabilities.
Whether the system runs out of that statutory in 2034 or 2049 or
whatever date we produce by crediting enough IOUs to the Trust
Fund, makes no actual economic difference.  The fact remains that,
beginning in the year 2014, increasing general revenue outlays
would need to be made.

Terms such as "advance funding" and "transition cost" are often
tossed around in the Social Security debate without much attention
to their actual meaning. One way to think of a "transition cost"
is that it is a requirement that we put aside some funding today
in order to lessen our financing burdens tomorrow.  Any family that
forces itself to put aside a small portion of its income each year
to save for retirement faces an analogous situation.  Its income
available for consumption is reduced somewhat in the near term,
but when they hit retirement age, they are closer to meeting their
retirement income needs. So, while "transition costs" of advance
funding are real, they should be faced as a necessary means of
sparing posterity from an unfortunate legacy of spiraling taxation.

Our Social Security system faces a situation similar to the family
that is deciding whether to put some funding aside today.  We need
to find a way to save surplus Social Security taxes today so as to
reduce the tax burden on tomorrow's workers.  If we do not, we will
effectively pass on tax burdens to them that are much larger than
anything that previous generations left to us.  It is a recognition
of this need for advance funding that has been at the basis of so
many reform proposals, although sponsors differ as to whether this
advance funding should be accomplished through personal accounts
or through government investment of the trust fund in the equities
market.

I believe strongly that personal accounts are the preferable method
of advance funding, for reasons that have been detailed in the
"lost" message but I will abbreviate here for the sake of making
sure the information is available.  1) Investment of the Social
Security Trust Funds in the equities market does not produce new
saving but simply redistributes the gains from existing saving,
bringing more to the federal government and taking from the private
retirement savings system.  Personal accounts, by contrast, can
become a vehicle for new saving if voluntary savings contributions
are permitted on top of existing savings levels.  2) Government
investment in the stock market has no political viability (it was
recently subject to a 99-0 vote of opposition on the Senate floor)
and carries the risk of government manipulation of the private
market.  3) Global empirical data compiled by the World Bank on
the rates of return received by publicly managed pension systems
show that their historical rates of return are sufficiently lower
than those subject to personally directed control so as enable the
latter to more than absorb any administrative cost of personal
accounts, and 4) Government investment of the Trust Fund in the
equities market forces everyone into stocks, whether they are
personally comfortable with this or not, and makes the solvency of
the system as a whole dependent upon the growth in the stock market.

This last observation may provide a natural segue to the question
offered by Mr. Baker.  The means by which our proposal was developed
did not reference stock rates of return.  Rather, we work with the
Social Security actuaries in order to determine what changes to
the traditional Social Security system are required in order to
bring it into actuarial balance, without reference to stock rates
of return.  Through this process we were able to determine an
appropriate amount of advance funding that could be incorporated
into the current system by requiring that surplus payroll taxes be
saved instead of being loaned to the federal government to underwrite
consumption. Subsequent to this process, our work is turned over
to the Congressional Research Service, who analyzes the results
based on a variety of assumptions.  They generate one set of numbers
assuming the Trust Fund interest rate (this year it projects to be
approximately 3% real) and another assuming the historical stock
rate, as "boundary" projections on the benefits that the reformed
system would provide.  It is fairly straightforward to show that
regardless of which rate one assumes for the personal accounts, or
whether one chooses to consult an intermediate figure, the reformed
system incorporating advance funding will provide a better deal
than the current tax-as-is-necessary structure.

In general, our proposal would improve the deal for low-income
beneficiaries by strengthening the defined benefit guarantee so as
to assure that even if they receive only a 3% rate of return in
the personal account, their benefits will be superior to the old
system.  For high-income beneficiaries, the principal gains come
on the tax side.  In the year 2025, for example, general revenue
outlays would be 55% lower than under the current pay-as-you-go
system, greatly decreasing the pressure on income taxes.

I agree with Mr. Baker that is dangerous to require the entire
Social Security system to be tied to stock market performance.
This is one reason why I have not supported proposals to invest
the Social Security Trust Fund in the equities market, nor have I
supported proposals that tie the government's outlay liabilities
to the rate of accumulation in personal accounts, requiring
individuals to invest in a given distribution of equities and bonds.
One advantage of personally-controlled accounts is that individuals
will be free from the disadvantages of the alternative means of
shoring up the system -- whether cutting benefits, raising taxes,
or being forced into the stock market against their will and wish.

I hope that this answer also provides a response to Mr. Jimenez
about his questions.  Clearly, I am of the view that administrative
costs under a personal account system can be manageable, in answer
to his second question, and I also believe that his first point
about the declining rate of return in Social Security is one that
we ignore at our peril.  While rate of return is not the only
measure of the system's efficacy,  it is equally clear that the
program will not remain politically viable once it gets to a point
where whole generations conclude that they are losing money through
it.  Even its value as "insurance" would be destroyed if individuals
are compelled to pay more for that "insurance" than is equitable.

I thank you for the opportunity to respond and  I hope that this
and the "lost message" will provide at least a preliminary answer
to some of your questions.

     Senator Judd Gregg