RE: Projections of Stock Returns

[National Dialogue Moderator <moderator>]

My answer to Mr. Baker's question would be yes.  If we were to
embrace a policy under which Social Security solvency depended upon
rates of return in the stock market, it would be wholly appropriate
for the Social Security Trustees to include projections for the
components of stock returns in addition to their projections for
wages, life expectancy, and all other variables relevant to solvency.
I do not, however, support investing the Trust Fund in the equities
market regardless of the projected rate of return, and thereby
making the solvency of the Social Security system so dependent.
Because I have concerns about the potential for government manipulation
of the private market, and because of a number of other reasons
detailed in a previous message, I do not support making the solvency
of the Social Security system dependent upon stock market rates of
return.  (Nor do I support creating personal accounts in a way that
makes OASDI outlays dependent upon projected rates of accumulation
in the personal accounts.)  I do not believe that a plan to invest
the Trust Fund in the stock market has political viability, but if
it were to be seriously considered, than I would certainly join
with Mr. Baker in believing that this new factor affecting Trust
Fund solvency should be evaluated thoroughly in the annual Trustees'
reports.  As the Congressional Research Service recently showed,
if the projections do turn out to be too optimistic, proposals to
invest the Trust Fund in the stock market will result in an insolvent
system, unlike my plan or the Kolbe-Stenholm plan.

Mr. Baker has opined that it may make little sense to invest Social
Security money in the stock market in any form (presumably even in
personal accounts that do not factor into Trust Fund solvency.)
I would stress that one advantage of personal accounts is that they
do not oblige any individual to invest in the stock market against
their wish.  I would, however, amend Mr. Baker's comment with my
opinion that it is essential that surplus payroll taxes -- the
money not now required to pay benefits --  be invested in some
instrument other than securities of the federal government, so as
to advance-fund a portion of the system.  Again, I do not believe
that this should be done by federal government purchases in the
stock market, but rather through personal accounts that do not
affect the system solvency that the Trustees must measure and
maintain.  But whether the assets bought with surplus Social Security
taxes are invested in personal accounts, or whether they under a
contrasting philosophy are used to buy equities for the Trust Fund,
it is essential that some be invested in tangible assets that exist
outside of the federal government.

Under current practice, no advance funding is possible;  surplus
taxes are used to underwrite current federal consumption, and thus
debts by the federal government to Social Security cannot be redeemed
by drawing down a real asset, but only by exploiting the federal
government's authority to raise taxes.  Regardless of whether the
rate of return is maximized by purchasing stocks or whether it
involves generating another form of financial asset, it is essential
that advance funding be accomplished in some way, which by its
nature the federal government is incapable of achieving by loaning
the money to itself. The best that the government can do is to use
surplus taxes to reduce its other debt.  If the federal government
had no other borrowing to buy down, it would still have no mechanism
to store trillions in assets that could later be cashed in.

I would include one final comment in my reply to Mr. Baker. The
Trustees' reports of declining GDP growth are not premised principally
on projections of a declining return on capital.  Rather, they
reflect the fact that the portion of the working population relative
to the whole population will drop as a consequence of population
aging.  On a per-capita basis, the Trustees are not projecting a
slowdown in productivity growth.  Their projections are solely the
result of our current practices of inducing individuals to spend
a greater portion of their lives in retirement.  My proposal contains
several elements designed to reward continued work -- including
correcting the actuarial adjustment for delayed retirement, crediting
all years of earnings in the AIME formula, and repealing the earnings
limit.  If we do wish for GDP growth to turn out higher than
projected by the actuaries, then we must pursue policies that remove
current-law disincentives to work.  This again argues for reform
of the current system.

     Senator Judd Gregg