RE: Questions on the Archer-Shaw Plan

[National Dialogue Moderator <moderator>]

	Thank you for your interest and your questions, Steve.  I hope the
following explanations help to clarify the Archer/Shaw proposal. 

	1) "What exactly happens when a person retires?"	

		Under the Archer/Shaw plan, when a person retires, the
Social Security Administration calculates a monthly payout based on the
Guarantee Account balances.  This calculation is similar to an annuity
calculation that accounts for life expectancy, inflation, expected earnings
on the account, and joint/survivor benefits.  The worker is entitled to
monthly lifetime benefits equal to the calculated monthly payout or the
current law benefit -- whichever is higher.  Each month, the worker will
receive one check from the Social Security Administration for the full
amount of the benefit.  To help pay for this benefit, the calculated monthly
payout is transferred from the Guarantee Account to the Social Security
Administration.  Some people have referred to this as a "clawback."
However, it is important to note that ALL plans to save Social Security have
some mechanism by which Social Security's costs are reduced.  Some plans
simply cut benefits to achieve these savings.  This plan uses the account
balances to help pay the workers benefits, thus avoiding cuts in the
guaranteed safety net.

	2) "What is the real rate of return?"

		The real rate of return used in the calculations is that
provided by Social Security's actuaries based on historical averages.  They
assume that stocks and corporate bonds will yield real average annual rates
of return of 7 percent and 3.5 percent, respectively.  The real rate of
return used in the calculations also accounts for administrative costs,
which are capped at 25 basis points (an amount SSA believes is reasonable
given the design of the accounts).  Thus, the total real return on a
potfolio comprised of 60% stock index funds and 40% corporate bonds is 5.35
percent:

	(60% x 7%) + (40% x 3.5%) - 0.25% = 5.35%

	3) What is the size of the Guarantee Account pool relative to GDP?"

		Using GDP numbers from the 1999 Social Security Trustees'
report, the asset pool would be 1.7% of GDP in 2001, 14.9% of GDP by 2014;
and 52.5% of GDP by 2074.  However, it is important to note that the GDP
numbers used by the Trustees are very conservative.  They assume about 1.5
percent growth in long-run GDP, which is very low compared to historical
averages.  If GDP growth is closer to historical averages, the relative size
of the asset pool will be substantially smaller.  The numbers are large in
this calculation because they assume that the assets grow at 5.35 percent
while the economy grows at only 1.5 percent.


	4) "What will the size of the Social Security Trust Fund be,
relative to GDP?"

		Over the next 30 years, trust fund balances would average
about 16 percent of GDP.  Thereafter, trust fund balances would decline
relative to the size of the economy and stabilize at around 8% - 9% of GDP
in the long run.  The reduction in the relative size of the Trust Fund is a
result of future payroll tax cuts in the plan.  However, the Trust Fund
balances never fall below the desired minimum level set by Social SEcurity's
Trustees.

	I hope my explanation has been helpful.  More information, including
details on the Social Security Actuary's estimate, is available at:
http://www.house.gov/archer/social_security/index.html


Rep. Clay Shaw