Stock Market Returns

[National Dialogue Moderator <moderator>]

Mr. Baker, an economist with the Economic Policy Institute, has asked the
panelists to indicate their support for stock market projections by the
Social Security Administration.  The Kolbe-Stenholm Social Security reform
plan is balanced and solvent regardless of the performance of the stock
market, so it doesn't make sense to me why these projections are important
with respect to the viability our plan.  

There are, of course, other bills in which the rate of return on the stock
market is the key to solvency.  In these plans, the balances that accrue in
an individual's personal account are used to offset the defined benefit an
individual is to receive from Social Security.  This is also known as a
"clawback."  Example: for each dollar an individual withdraws from their
personal acount, they sacrifice one dollar in their defined benefit from
Social Security.  Under this type of plan, a high rate of return will
generate a larger balance in an individuals' personal account (ceteris
paribus) and therefore reduce the government's financial obligation to that
individual through a smaller Social Security benefit.  A low rate of return
will result in a smaller balance in an individual's account and therefore
require the government to compensate with a larger defined benefit from
Social Security.  In summary, under these plans the government's financial
obligation is inversely related to the performance of the stock market.
Ergo, the plan's solvency and cash flow balance also is dependent on stock
market performance.

There is no "clawback" in the Kolbe-Stenholm plan.  The money an individual
accrues in his/her personal account is in no way related to the defined
benefit they are entitled to receive from Social Security.  The two benefits
-- the personal account and the defined benefit -- are completely separate
from one another.  Under our bill, it makes no difference whether personal
accounts earn 1.2% or 12.1%, our plan is still solvent and balanced.

Where the rate of return will matter is in comparing an individual's total
Social Security benefit under current law and under any new proposal.
Before undertaking such an analysis, however, Americans must realize that
the Social Security benefits the government has promised for future Social
Security cannot be met under the current system.  Even if you assume that
the IOUs in the Social Security Trust Fund can magically be turned into cash
benefits, by 2034 the Trust Fund will be depleted and EVERYONE will
experience a 25-28% cut in benefits across-the-board.

That said, the changes we make to the defined benefit portion of Social
Security in the Kolbe-Stenholm bill are phased in slowly over time.
Assuming a real rate of return of 4.5%, the balance that accrues in an
individual's personal account will AT LEAST compensate for the reduction in
the defined benefit.  Moreover, the reductions in the defined benefit are
confined to the top two bend points, shielding vulnerable populations like
the working poor from the benefit reductions.  We also include a minimum
benefit provision that further enhances the defined benefit of this group.
For them, the personal account is pure "icing on the cake."

-- Jim Kolbe