Reply to Various Questions

[National Dialogue Moderator <moderator>]

   I greatly appreciate the many comments sent through this forum, as
well as the many questions, impossible though it is to respond to
them all.  I also appreciate the continued participation of my
colleagues in this forum, even those whose policy views differ from
mine.  I would like to take the opportunity to respond to a few of
the points that have been made in the last couple of days.

   Congressman Nadler's message notes that personal accounts would
have higher administrative costs than a central fund managed through
the auspices of the federal government.  I will not say "invested
by the federal government," in recognition of Congressman Nadler's
objection to that terminology.  However, it would be invested
through a centralized board rather than through the choices of
individual beneficiaries.  The Congressman's point about administrative
costs being higher for personal accounts than a system that lacks
them is certainly true.

   On the other hand, there are also powerful arguments in the other
direction.


   1) The empirical evidence compiled by the World Bank is that the
rate of return on such investment when directed by individuals is
sufficiently higher than those that are publicly-managed in any
such respect, is more than enough to absorb the administrative
costs.

   2) Moreover, personal accounts can be a vehicle for additional
voluntary saving, whereas merely shifting existing saving through
re-investment of the Trust Fund, cannot add to net national savings,
and thus cannot add to net national retirement income. It simply
redistributes the gains from existing saving.  Any increased rate
of return for Social Security would simply come from reduced savings
returns in the private market, reducing income from pensions and
IRAs.

   3) And finally, there are the issues of political interference.
Although there would be every intention of shielding this investment
from the political proces, we have seen in similar practices at
the state and local levels that political considerations do often
enter into the investment of such public monies.  A group of unions
recently wrote to Congress and listed the sorts of corporate
practices that they would not wish to see underwritten by investment
of Social Security money, implying that if such investment were
pursued, it would quickly become politicized.  One message posted
in this forum even listed a few corporate practices that the author
would not wish to see subsidized with his Social Security money.
With a personal account system, no one is obliged to invest in
corporations that they do not wish to invest in, whereas the desire
to control the aggregate investment in a collective equity investment
strategy has already, even  before enactment, drawn the attention
of those who wish for such investment to be limited to a particular
political agenda.

   In sum, the essential question differentiating between collective
investment and personal accounts is whether the lower administrative
costs of the collective investment approach are sufficient to
outweigh the combination of these competing considerations, which
include the empirical history of comparative rates of return, the
increased opportunity for additional voluntary savings, ownership
rights over benefits, and the reduced chance of political interference
in the investment market.  My view is that the latter considerations
are sufficiently persuasive enough to argue for absorbing the
administrative costs of personal accounts at the levels that the
Social Security administration has estimated that they would be.

   It is important to note, however, that for a given degree of advance
funding, certain realities exist regardless of whether advance-funding
is accomplished through personal accounts or through collective
investment of the Trust Fund.  For example, "transition costs" are
often cited as a problem, as though these apply to personal account
proposals alone.  Proposals that would invest the Trust Fund in
the equities market have exactly the same type of transition cost.
The money is invested in the equities market rather than in the
federal government, so it cannot be used to offset other federal
borrowing or consumption.  Other federal borrowing must therefore
increase. No matter how the advance funding is accomplished, it is
the amount of the advance funding that determines the "transition
cost," not whether it is done through the Trust Fund or through
personal accounts.  "Transition costs," therefore, are not an
argument that should be applied against personal accounts simultaneously
with embracing investment of the Trust Fund in the equities market.

   There have been many comments posted about the various plans, and
I would simply ask the participants in this forum to notice that
currently, we are on a track to have benefit outlays that are equal
to approximately 18% of payroll by 2030, and have a current Social
Security payroll tax level of 12.4%.  Our Gregg-Breaux-Kerrey-Grassley
Senate bipartisan plan is very specific in how it would phase in
the degree of advance funding, how it would phase away the unfunded
liabilites of the pay-as-you-go system, and all of the choices that
it makes.  It is by no means a perfect or flawless plan, but it is
very explicit in how everything would be done.  I would simply ask
that some skepticism be shown concerning plans in which taxes are
not raised, benefits are not cut, and yet all of the multi-trillion
dollar financing gap appears to vanish as if by magic.  As my
colleague Congressman Stenholm often likes to say, "If something
sounds too good to be true, it probably is."  Plans that seem to
solve problems without making any of the choices in our legislation
or in the Kolbe-Stenholm plan must therefore have hidden costs that
are more difficult to discern.  Frequently they come in the form
of the tax burdens associated with paying off the Trust Fund.

   Mr. Johnson has posted a number of kind comments and has added a
tremendous amount to this debate.  I would like to present my view
of a couple of the issues that he has raised.

   First, you ask whether we can interpret the 2015-2030 period as a
period of "refinancing," in contrast to the financing that we would
need to keep the system going after 2034.  It is true that we (the
federal government) could certainly go out and borrow additional
money instead of immediately raising taxes.  However, this would
simply delay rather than eliminate the costs presented to taxpayers.
Moreover, there is nothing economically different about the position
of the federal government in 2025, versus 2040, regardless of the
fact that the Social Security Trust Fund is "solvent" on the first
of those dates.  As the Congressional Budget Office, and the
President's own Budget have noted (quote from President's budget,
page 337, Analytical Perspectives Section:)

   "Trust Fund balances are available to finance future benefit payments
and other trust fund expenditures -- but only in a bookkeeping
sense. . . . they do not consiste of real economic assets that can
be drawn down in the future to fund benefits.  Instead, they are
claims on the Treasury that, when redeemed, will have to be financed
by raising taxes, borrowing from the public, or reducing benefits
or other expenditures.  The existence of large trust fund balances,
therefore, does not, by itself, have any impact on the government's
ability to pay benefits."

   This is very important to recognize.  We can issue all of the
credits to the Trust Fund that we like, but it has no economic
significance for our ability to finance future benefits, other than
the Social Security system's right to make a claim on general
revenues at that time.  So, under current law, after 2034, Social
Security would no longer have the right to make that claim.  And
if we enacted the President's proposed "transfers" to Social
Security, this would be true through 2049.  But this has no bearing
on the tax levels that are assessed to future generations.  Those
begin to go up in 2014.  Either they must be taxed, or the government
must borrow heavily.  The fact that the Trust Fund is theoretically
"solvent" through 2034 does not obviate this reality.

   It is for this reason that I would disagree with your subsequent
message that we should adopt the Clinton proposal to "contribute
an additional $2.8 trillion from general revenues to Social Security."
This would have no positive effect and would only be a declaration
that future generations will be taxed to support our retirement.
We could instead make that figure $10 trillion, and declare the
problem solved -- but we would not have achieved anything other
than to sentence future taxpayers to skyrocketing tax rates.

   There is certainly nothing objectionable in the rhetoric employed
by the administration, that debt reduction in the next few years
should be employed to stabilize Social Security.  However, that is
not the reality of the proposal above.  Saving a large portion of
the unified surpluses over the next years, and crediting that to
Social Security, would only approximate what current law assumes
will happen anyway.  The Clinton proposal is to credit the surplus
a second time to Social Security, so that $5.1 trillion is credited,
altogether, to the program over the next 15 years, even though the
President's budget does not propose to pay down anything resembling
$5.1 trillion in debt.  The transfers to Social Security are
unrelated to buying down public debt, and have no impact other than
to increase the size of the tax levels that future generations
would be legally obligated, through the federal government, to pay
to redeem the Social Security Trust Fund.

   While it sounds like a painless way to reach solvency, in reality
it means that our grandchildren would suffer from horrendous tax
levels.  The federal government simply cannot make a $928 billion
outlay to Social Security from general revenues in the year 2030
-- not a paper "credit" as has been proposed for this year, but an
actual cash outlay generated immediately at that time -- without
increasing taxes or borrowing to unsustainable levels.  I wish it
were otherwise, but there is no magic bullet out there that will
make this happen.  We simply have to face the reality of getting
the revenues and outlays of this program to balance.

   A purposely extreme example can be used to make the point.  Congress
could, today, create the Steve Johnson Billionaire Making program
that entitles everyone named Steve Johnson to an income of $1
billion in the year 2000.  This year, we could create a special
"Trust Fund" and issue any amount of credits to it that is necessary
to make all of the payments, without costing taxpayers a cent for
the accounting change.  The program would be declared fuly "solvent"
for its duration.  Next year, however, the Steve Johnson Trust Fund
would redeem its assets and pay benefits to all of the Steve
Johnsons.  The government would therefore, in the year 2000, have
to come up with the money somehow.  It is a purposely silly
illustration, but it is to make the point that this is exactly what
we are doing with the Social Security Trust Fund, and exactly what
we are doing when we are making "credits" or "transfers" to the
Trust Fund.  We're creating nothing other than an obligation to
spend money tomorrow.

   I would add one final point, which is that all objective calculations
show that overall benefit levels under our Gregg-Breaux-Kerrey-Grassley
Senate bipartisan plan and the Kolbe-Stenholm plan are higher than
under current law in 2075, even with the vastly lower tax rate.
It is not so unlikely an outcome when one thinks about it.  It is
a consequence of moving from pay as you go to a partially funded
system.

   I would like to make another extreme example just to make the point.
Pretend that you are in a country in which there is one person in
your generation, and thanks to your generation's low birth rate,
one in the next one.  Suppose that the goal of your "nation"s
retirement system was to provide you with a retirement income that
was equal to 60% of your working wage.

   Let's examine two possible scenarios:

   In a partially funded system, you would have put aside money each
year for your own retirement, and the next generation would not be
paying for you except to the extent that you came up short of your
needs.  Let's pretend that under this system, you put away 5% of
your income each year.  And, it turns out that this was enough to
get you an income that was equal to 20% of your wages, at the end
of the game.  (It's not unreasonable to assume that if you put
aside 5% of your wages each year, you could ultimately produce an
income that is equal to 20% of your working wage.)  So you get that
20% from your own savings, and the next generation in this tiny
nation faces a tax rate equal to the remaining 40% to support you.
They put 40% into supporting you, and are also required to put
aside 5% of their own.

   In a pay-as-you-go world you don't put anything aside.  When you
retire, all of that 60% level comes from taxing the next generation.
So the next generation, in this example, must pay a tax rate of
60% to support you, one worker supporting one beneficiary.  Because
there was no advance funding, their tax rate has increased by half.

   In this crude example, simply putting aside 5% each year -- one-eighth
of the full-funding tax rate (40%) or one-twelfth of the pay-as-you-go
tax rate (60%) has enabled us to cut future tax rates by a third.

   Again, this isn't magic. It's just the result of building some
funding into the current system.  It is not implausible at all that
building a modicum of funding into the current structure will enable
us to eliminate the vast majority of projected tax increases without
cutting total benefits.  It is simply a function of the fact that
the current-law tax cost projection of 19% in 2075 has nothing to
do with any rate of return assumed in the meantime.  It is unrelated
completely to those concepts, and refers only to the benefit promises
in that year, and the expected ratio of workers to retirees.

   Assume for the sake of argument that you anticipate that a natural
disaster will strike America's workers in the year 2074, cutting
the 2075 working population in half.  Now the pay-as-you-go tax
rate of 19% must double to 38%.  As you can see, this pay-as-you-go
tax rate has nothing to do with the rate of return that is reasonable
to expect from 2% accounts, but rather is an estimate of the future
ratio of workers and retirees, and has nothing to do with whether
benefits have been cut 45% or 75% or any other figure.

   I don't know if these illustrations help, but the point of them is
that 2% can indeed make up for a large funding gap or larger if
the gap would otherwise not be saved at all, and benefits simply
generated by assessing higher tax levels on the next generation.


   Senator Judd Gregg