3. Questions for Congressmen Nadler & Pomeroy

["Steven H. Johnson" <info@sscommonsense.org>]

Again, these questions are asked in a quality circle spirit, in 
the interest of developing a robust solution that truly 
addresses the concerns of all stakeholders.

My first question to you is this:

D.  Isn't "Actuarial Balance" the wrong goal to strive for?

If I chart the basic Nadler proposal on my spreadsheet model, 
here's what I find.
With an assumed rate of return of about 3.4% in the Trust Fund, 
the Nadler proposal does indeed achieve actuarial balance.  

On the other hand, here's what happens to the Social Security 
Trust Fund, measured as a percent of GDP, under a Nadler-type 
proposal, with a real return of 3.4%.  
By 2025, the Trust Fund grows to 51% of GDP.
By 2050, it declines to 38% of GDP.
And by 2075, sagging fast, the Trust Fund's down to only 7% of 
GDP.

By 2075, Social Security insolvency is only a year or two away.    

What does it mean to say that "actuarial balance" is the wrong 
goal?
One need only look at the definition.
Actuarial balance, as defined by Social Security, is achieved 
when enough money is expected in, over the next 75 years, to pay 
benefits for the next 76.
In other words, to be blunt about, any plan that postpones Social 
Security's insolvency date to the 77th year can be said to be 
"in actuarial balance."

The Greenspan Commission in 1983 made the mistake of aiming at 
"actuarial balance," not at lasting solvency.

E.  Wouldn't it be better not to repeat the 1983 commission's 
decision to aim only at actuarial balance?  Wouldn't it be a 
mistake for us to do the same?

To achieve true solvency, a 3.4% rate of return is not nearly 
sufficient.
A return rate of 4.1% in the Trust Fund is strong enough to get 
the job done.
Then, with the Nadler proposal in force, the Trust Fund would 
grow to about 70% of GDP, and remains at that level in perpetuity.

On the other hand, consider the implications.

Suppose that real stock market returns average about 5% in the 
decades ahead.

And suppose that real returns on bonds average three percent.

A 55/45 stock/bond portfolio mix, with stocks earning 5% and 
bonds earning 3%, yields a weighted average return of 4.1%.

If stock returns are averaging 5%, the Market Capitalization-to-
GDP Ratio is probably averaging about 100%.

Now - consider the implications of growing the Trust Fund to 70% 
of GDP, with 55% of its assets held in stocks.

Wouldn't the Trust Fund end up owning about 30% of the entire 
stock market?
Is this a level that the American people would accept?

Which raises another, and quite serious, issue, about the 
overall strategic approach that's associated with Robert Ball, 
Henry Aaron, Robert Reischauer, and a number of the Congressional 
Democrats, including yourselves.  Let's call it the Trust Fund 
strategy.

The Trust Fund strategy brings with it two possible outcomes, 
both of them highly problematic.  

The cautious version.  On the one hand, Congress could pass a 
Democratic proposal that achieves "actuarial balance," but not 
genuine solvency.  The Trust Fund peaks in 2025, but goes 
belly-up shortly after 2075.  

>From one angle, it's a low-risk approach.  The Trust Fund doesn't 
have to invest very heavily in the stock market.  But it's 
nevertheless a strategy that falls well short of achieving 
lasting solvency.  

The aggressive version.  On the other hand, Congress could take 
a more aggressive approach to stock market investing.  Would 
personal accounts have a 50/50 stock/bond portfolio?  Then the 
Trust Fund should be authorized to have a 50/50 stock/bond 
portfolio.

But the aggressive version of the Trust Fund strategy ends up 
with the Trust Fund owning a quarter to a third of the entire 
stock market.

What are the political chances of such an outcome being accepted 
by the American people?  Even if there are two or three or four 
layers of insulation?  Very low, I should think.

The Trust Fund strategy ends up in a real conundrum.

When Henry Aaron compares the Trust Fund to personal accounts, 
as investment vehicles, he always assumes an equally rich 
stock/bond mix in both.  And, given that assumption, he's right.  
The Trust Fund is a little more efficient than personal accounts, 
as an investment vehicle.

But look what happens next.  As soon as the Trust Fund strategy 
makes the journey from Brookings down to Capitol Hill, something 
of a transformation takes place.  The Trust Fund gets watered 
down as an investment vehicle.  What started out as a 
fifty/fifty stock bond mix at Brookings turns into something 
like a twenty-eighty stock bond mix on Capitol Hill, which makes 
the Trust Fund much less efficient as an investment vehicle.  

(Republicans reading this are nodding their heads in agreement.)

This puts the Democrats up against it, doesn't it?  And I come 
out of the same political tradition you do.  My dad was quite a 
liberal when he served in Congress in the late fifties.  In fact, 
he even wrote his doctoral dissertation on Social Security, some 
years before that.  He came out of the Wisconsin economics department,
which played such a strong early role in setting up Social Security.

The Democrats' aversion to private accounts leaves the liberal 
wing of the Democratic Party on the horns of a dilemma.  Water 
down the Trust Fund, and it's nearly impossible to achieve 
lasting solvency unless benefits are also slashed fairly 
aggressively.  Beef it up, and a Trust Fund-only strategy for 
"funding the gap" gobbles up a huge chunk of the stock market.

F.  Which gets to my final question for you:  Assuming that the 
Democrats' basic desire is to close the gap by funding the gap, 
rather than by cutting benefits, isn't it possible that the 
Democrats' strategy still needs some more tuning up?

Regards,

-Steve Johnson