Response to Steven Johnson

[National Dialogue Moderator <moderator>]

Thank you for your comments and observations about Social Security's
future and long-term trends in retirement savings.

You have obviously put a lot of thought and study into these issues,
and I appreciate the degree to which you are getting involved in
this very important debate.

I have read many analyses concerning one of your overall points:
i.e., the long-term earnings from stocks are determined by the
economy's overall growth rate or growth in Gross Domestic Product
(GDP).  As the argument goes, because the economy is predicted to
grow more slowly in the future, due almost entirely to a decrease
in the relative size of the workforce stemming from the baby boomer
retirements and workforce participation of women is leveling off,
you infer that current trends in equity earnings, ipso facto, cannot
continue.

Whereas Social Security's current structure can only bear returns
that mirror real wage growth and growth in the labor force, I am
not convinced that our financial markets are contrained by such
iron laws of mathematics.  Though I do not share your apparent
intensive background in the minutiae of equity investment, I would
like to make a few points to your comments/questions.

First, I tend to be particularly cautious of any long-term economic
predictions.  Take the example of our current unified budget
forecasts.  Some of the very best minds in financial and econometric
modeling at the Congressional Budget Office (CBO) are right now
confounded by the extent of our current unified budget surpluses:
They do not know how the U.S.  Treasury is continuing to bring in
higher revenues over outlays.  Moreover, CBO reports that its
projections of the federal budget balance made five years in advance
have, on average, been off by 13 percent of projected outlays.
With this margin of error, the surplus of $239 billion it now
projects for the year 2004 could just as easily be a deficit of
$14 billion.  And beyond five years, warns CBO, the projections
become even more uncertain.

If there is, in fact, a definitive cause-and-effect, covariable
relationship between GDP and short-term earnings growth, I have
not seen it born out in major economic literature.  Indeed, if
memory serves, in the early 1990s, though we were in what economists
technically called "a recession" (at least two consecutive quarters
of declining GDP growth), both the S&P 500 and the Dow Jones
Industrial Average posted record highs that have continued to this
day.

Second, with regard to future economic growth and rates of return
on equity investment, there is general among economists that most
of the consumption that occurs in, say, 2030 will have to be provided
for by production in that year.  This, then, begs the question:
Is it possible for us to do anything today to increase the quantity
of goods and services that can and will be produced in 2030 for
consumption by retirees?  Yes, I believe it is, and we can achieve
this by bringing under control Social Security's massive unfunded
liability and enacting policies to increase personal and national
savings.

Under our current system, the financial "savings" represented by
the Social Security Trust Fund (and all the other public and private
pension savings) can affect only the distribution of goods and
services produced in 2030.

However, unless Social Security reform actually enhances our ability
to produce goods and services in the year 2030, the amount to be
distributed will be exactly the same whether the Social Security
Trust Funds are larger or smaller.  This is why incorporating
personal accounts into Social Security's defined benefit structure
is a preferable solution to the system's long-term financing
challenges.  In my opinion, a saving economy is a growing economy.
While there are no ironclad rules for keeping our economy growing,
evidence suggests that policy-makers can help create and/or maintain
such an environment to fuel economic growth by through two primary
factors, as you mentioned:  growth in the labor force (something
which we know will cease very soon, as demographics is destiny when
it comes to Social Security's current pay-as-you-go structure);
and increases in real productivity, which in turn can be enhanced
by increases personal and national savings, increases in the
education of our workforce, and technological progress.

I do not believe it can be overstated that increasing personal
savings is critical to saving and strengthening Social Security.
We currently have an all-time low personal savings rate in this
country.  In much the same way that today's unfunded pay-as-you-go
program is breeding its own demise, a system of mandatory personal
savings accounts would contain the seeds of its own success.  By
increasing personal savings and reducing Social Security's unfunded
liabilities, higher capital formation can drive economic growth,
which in turn can provide the economic basis for sustainable benefits
as well as greater public investments.

I am not saying whether or not the past returns on equity investment
will continue into the future.  That is a point that is certainly
open to dispute and cannot, in my opinion, be definitively answered.
We do have, however, historical performance and trends, trends
which have not necessarily adhered to specific cause-and-effect
relationships in the short-term, but have led to long-term wealth
creation and increases in our economy's capital stock.  I am sure
you are familiar with the extensive research by Jeremy Siegel of
the University of Pennsylvania's Wharton School.  He has found that
over 20 years and more, stocks are no more risky than Treasury
bonds.  "The safest long-term investment for the preservation of
purchasing power has clearly been stocks, not bonds," he has written.
In addition, Siegel points out, investors who are considering
purchasing a stock do not just consider the current year's earnings
but also take into account the entire future stream of earnings
that a company's share is likely to produce.  It should also be
noted that these earnings not only include the dividends that a
firm pays out but also increases in the total value of the underlying
assets owned by the firm.

Thank you, again, for your contributions.  I hope that you continue
to ask poignant questions and offer your own ideas for reforming
Social Security.


Senator Rick Santorum