Long Lost Message: Questions for Mr. Ridgeway and Mr. Hart

[National Dialogue Moderator <moderator>]

     To: Mr. Ridgeway and Mr. Hart:

Thank you for your questions.  I will do my best to give an answer
that addresses a fair number of them, although we have been advised
to give short conversational answers as opposed to long speeches,
which may make it impossible to touch upon every one.

The terms "Ponzi scheme" and "pyramid scheme" carry negative
connotations regarding ill motives to defraud or to swindle, so I
will avoid using any such terms to label the Social Security system.
However, there is a sense in which the Social Security system does
indeed have a "pyramidal" structure.  The pay-as-you-go financing
could only work perpetually on the assumption that each succeeding
generation would be sufficiently larger than the one before.  The
working generation's payroll taxes are used to pay benefits to
current retirees.  They are at the same time promised that future
workers will someday be taxed sufficiently to pay benefits to them.
At some point, the logic of this breaks down.  Either tax levels
reach a point where it is no longer feasible to expect that promised
benefits will provide a reasonable return on taxes contributed, or
the following generation will be too small in order to pay for
those promised benefits without being assessed confiscatory tax
rates.  We face a combination of both of the above. (I often say
in public speeches that we have moved out of the pyramid into a
"rectangle," so the old structure cannot work forever.)

As a sponsor of a proposal that incorporates personal accounts, I
am often asked to justify my position in favor of a set of reforms
that includes personal accounts.  I have found that the question
of personal responsibility and control on the one hand, and societal
or communitarian responsibilities on the other, is one that often
divides my audiences.  Some stress that they could "do better" than
Social Security if they were allowed to invest for themselves,
whereas others stress the "social contract" embodied in Social
Security.  I try to get across to both groups that, regardless of
which values they choose to emphasize, some advance funding of the
retirement income system is necessary to prevent deterioriations
in the system's fairness.

Analysts across the political spectrum agree that there has been
a decline in expected rate of return from the Social Security system
as a function of birth year.  The younger you are, the more likely
it is that you will experience a lower rate of return on your
investment in Social Security than did your parents.  Troubling
though these figures are, they significantly understate the actual
inequity in the current system, because they measure the rate of
return on payroll taxes only.  Begining in 2014, general revenues
will be increasingly required in order to maintain the pay-as-you-go
system.  These general revenue (income tax) contributions do not
provide an individual with increased benefits, and they are not
included in measures of the rates of return that individuals receive.
In order to give a true picture of how the system treated someone
who was in the working population in the years 2014 and beyond,
one would have to incorporate these effects of additional taxes
paid with no benefits earned.  These effects are enormous -- the
equivalent of raising the payroll tax by 5 points by the year 2030.
The result would make clear that rates of return will become
tremendously negative for entire generations, when all contributions
and benefits are considered.

Clearly, the "rate of return" is not the only measure of the system's
proper functioning.  Many choose to emphasize the system's function
as a bulwark against poverty.  Nonetheless, it is an important
measure of the system's equity as well as its political viability.
Social Security, to date, has been the most widely supported
government program.  It is not likely that this will remain the
case if whole generations believe that they are getting a poor deal
from it, and are losing money through it.  Nor can it function
effectively as a poverty-prevention program if its effect on a
low-income individual's retirement savings is, on the whole, less
than what could  be received under an alternate system.

This is a circuitous way of returning to your question about whether
I support personal accounts (I do), and what I have to say to young
workers.  My message to young workers is that it is imperative that
some advance-funding be built into the system, or else the fiscal
pressures that they face will only become worse.  We have the
opportunity to put aside some funding today in personal accounts
and lessen the general tax burden that will otherwise begin to
escalate in the years after 2014, which would make it much more
difficult to pay for a college education or a home.

Regarding ending the current system "ASAP," I would stress that
the vast majority of current payroll taxes are needed in order
simply to pay benefits that have already been promised to current
retirees.  Even if we were to employ such measures as means-testing
and other politically controversial actions to the benefits of
current and near-term retirees, the vast majority of these costs
would remain.  I see the Social Security question to be one of
building a reformed system, including some advance funding through
personal accounts, for today's young workers, not one in which
current retirees, who have no recourse if their benefits are cut,
should be involved.

Mr. Hart's previous message about "asking the wrong question" is
an excellent one, because it points up the inadequacy of basing
our reforms solely on actuarial solvency and on "funding promised
benefits."  For, it is true that we could solve that problem by
fiat, by declaring the Trust Fund to have trillions more in assets,
assuring immediately that the system was "actuarially sound" and
that it would have full legal authority to pay promised benefits.
However, this would solve nothing other than to extend the government's
authority to tax in the future to produce these benefit levels.
If we want to bequeath to future Americans the economic opportunities
that were left to us, we must leave a different legacy than the
spiraling tax rates that would be necessary to fund the current
structure.

Mr. Hart also raised the question of "recognition bonds."  When
the President offered his Social Security proposal, I and a number
of other legislators were concerned about the new formal debt that
would be created simply by issuing a new series of credits to the
Social Security Trust Fund.  The scoring agencies divided upon
their reaction to the President's proposal.  CRS found that it
would have the effect of creating new spending and new taxation,
because the new debt issued to the Social Security Trust Fund would
create new authority to tax and spend in the years from 2034 to
2049.  They found that it would mean $1 trillion annually in new
spending as early as 2040.  CBO, by contrast, believed that existing
debt obligations were best understood in terms of current benefit
promises, and so the administration proposal had literally no
economic effect, because the balance credited to the Trust Fund
was irrelevant to the government's actual ability to fund benefits.
When CBO made this statement (effectively implying that the government
could issue new debt to the Social Security system without running
afoul of any budget restraints), I began to explore whether it was
possible to turn the President's proposal into something more
constructive, perhaps issuing the new bonds in the names of specific
individuals to recognize past contributions to the system, as a
means of effecting a transition to a partially funded one.  At this
time, I was exploring a number of options to make this transition,
and others turned out to receive more support within the Senate,
and therefore became the basis for negotiations instead.

I apologize that I have not touched upon every issue that you have
raised, but this message has already become too long, and I know
that you wish to hear from others.

     Senator Judd Gregg