RE: Risky investments -- Diane Lassiter

[National Dialogue Moderator <moderator>]

This is a good question, Diane, and one that is often misunderstood.

Defenders of Social Security's status quo often point to the fact that 
there is a false choice out there -- between saving and reforming 
Social Security.  The proposition is not one of personal accounts 
versus a guaranteed benefit.  All viable personal account plans 
maintain Social Security's strong safety net protections for all 
beneficiaries -- this is non-negotiable.  We all agree that Social 
Security should always remain a universal system of social insurance.  
But let us look at Social Security's "guarantees."  The 1977 Social 
Security reforms created Notch Babies who have received benefits 
significantly less than those granted to friends just a few years, or 
even weeks, older.  In 1983, Congress passed legislation that taxed up 
to half of a beneficiary's Social Security income.  This new tax, 
coupled with a six-month delay in COLA increases, cut benefits to some 
retirees by 27 percent.

Let's be clear here --  saving and strengthening Social Security 
with personal accounts is not risk free, but then neither is the 
current system, contrary to what Reps. Pomeroy and Nadler repeatedly 
insist.  Our current government mandated system of intergenerational 
tax dependence subjects all Americans to the perils of political risk 
and tampering -- i.e., the certainty that benefits will be cut or 
taxes increased in order to jam a square demographic peg through a 
round hole.  We saw this in 1977, 1983, and 1993.  Each time 
politicians told us that one last patch-work of tax increases and 
benefit cuts would suffice to "save" SS for the "long-term."  P.S.  
Here we are facing the same problems only with greater costs.  The 
only problem is that Social Security is so significantly underfunded 
this time that the degree of raising taxes or cutting benefits to 
maintain Social Security's "guarantee" will be truly wrenching.

Another salient point subject to hyperbole in this debate is that 
personal accounts will not be invested strictly in the stock market.  
Rather, individuals will be free to choose a range of risk options, 
including all government bonds if they so choose.  We know from past 
investment patterns and financial education that investors, as they 
age, tend gradually to shift their investments into more conservative 
vehicles.  If a worker nearing retirement had allocated his/her 
personal account assets to fixed-income securities, market corrections 
near retirement would have minimal, if any, effects on retirement 
income.

Nevertheless, let us assume a personal account portfolio of 100%
stocks.  Even factoring in the Great Depression, from 1926 to 1996
stocks averaged an annual nominal rate of return of 10.89%.  Over
the duration of the average workers' career, about 46 years, the
market's worst nominal rate of return (1926-74) was 7.32%.  Since
1978, the Standard & Poor's 500 index alone has risen more than
900%, despite three recessions and four major corrections, and the
average annual total return on the S&P 500 has been positive for
every ten-year period since the beginning of Social Security.
We're talking about "patient" capital versus "speculative" capital.
As any economist will attest, steady savings and investment over
time -- a 45-50 year working lifetime -- is the surest way to build
financial independence and retirement security.

Under current Social Security if one happens not to live until Social 
Security's age of old-age eligibility, then one has a lifetime of 
taxes paid in and nothing to show for it.
The 1999 Trustees Report tells us that benefits will have to be cut by 
a full 30% in 2030 if we do not reform Social Security in the interim. 
Thus, failure to leverage the markets' rate of return in personal 
accounts will lead to even lower rates of returns than the dismal ones 
that younger workers will face due to the iron laws of mathematics. 

It is interesting that many of the same politicians using market 
volatility to stall progress toward personal accounts, themselves 
embrace the government investment approach, where the federal 
government would directly invest (and continue to own) a portion of 
the Trust Fund.  Instead of insulating taxpayers for the risk 
associated with fluctuating stock prices, direct investment of the 
trust fund into equities would actually expose all retirees to the 
risks of market volatility by allowing risk to permeate through the 
entire system.  If stock prices decline such that the federal 
government is unable to pay promised benefits, the government's only 
recourse will be to issue more debt or raise taxes to fund the 
shortfall.  Thus, the burden of a decline in stock prices is not 
shouldered by the government, but by American taxpayers.

Remember also, with personal accounts the individual owns the 
investments.  Individuals currently do not have a vested personal 
property right to amounts paid into Social Security.  In Fleming v. 
Nestor (1960), the Supreme Court ruled that American workers paying 
payroll taxes into the Social Security system confers no legal right 
to benefits.  Fleming effectively said that workers do not own their 
contributions, and reaffirmed Congress's right to cut benefits at any 
time without workers' consent, as it has done numerous times in the 
past.

U.S. Senator Bob Kerrey (D-NE) recently offered the following 
rhetorical question that frames the point well: Ask federal employees 
whether the Thrift Savings Plan should be abolished due to the recent 
market volatility.  One might ask the same question of to workers who 
have the opportunity to participate in IRAs and 401(k) plans.


Thank you for your question and participation.

Senator Rick Santorum