4. Questions for the Privatizers

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

To reiterate the standing theme.  These points are made in the 
quality circle spirit of searching for the best all-around 
solution, not in the interests of giving one side partisan 
advantage vs. the other.

G.  Isn't it now the case that some of the objections raised 
against personal accounts really haven't been solved in any of 
the existing proposals?

It seems to me that one of the complaints made about personal 
accounts probably can be dealt with through intelligent 
management.  

The "High Fee" complaint is one of these.  Stipulate that 
personal accounts be held in index funds, and the fees come 
down to index fund levels.  Two-tenths of a percent is charged 
now, at a retail level.  Bring the government's wholesale buying 
power to bear, and the fees can be cut even more sharply.

As an example of the federal government's buying power, the 
federal government pays about two cents a minute for long 
distance phone calls.  Not bad, eh?  Imagine what the same 
buying power could do for management fees on PRA's.

The "progressivity" complaint falls in between.  The Kolbe-
Stenholm plan makes a valiant effort to preserve a measure of 
progressivity.  Personal accounts obviously work against 
progressivity.  Higher income workers come out ahead of lower 
income workers at the end of a career.  But adjustments to the 
basic benefit schedule can compensate for this somewhat.  
Rick Santorum's approach of helping lower income workers put a 
greater percentage of wages into PRA's than high income workers 
is another way of addressing the same issue.  Both plans are to 
be given credit for recognizing the issue and making a strong 
effort to overcome it.

There's an equity issue, though, that's harder to resolve.  A 
woman who takes off fifteen years to have kids between the ages 
of twenty and thirty-five won't do as well at retirement as the 
woman who works from age twenty to thirty and then takes off 
fifteen years.  Those who get their asset compounding started 
earlier will do better than those who start later.

And the "Longevity Risk" complaint hasn't been satisfactorily 
answered.  If the new retiree uses his PRA funds to acquire a 
lifetime annuity, and then dies a few years later, he doesn't 
get his money's worth from his funds, and he also may not have 
anything left to pass along to his heirs.  If he hangs onto his 
money, so that it's more easily passed along to heirs, but then 
draws it down too quickly, he may run out while he's still alive.

There's a good answer to this dilemma, but I haven't seen it 
ut forward by the Republicans yet.  It's an answer that works 
quite well, if private accounts are accompanied by a strong 
Trust Fund.

The "Cohort Risk" dilemma hasn't been well-answered either.  
The Kolbe-Stenholm plan lets the chips fall where they may.  
Cohorts that retire when the market is up will simply come out 
ahead of cohorts that retire when the market's just crashed.  

(Now Democrats reading this are nodding in agreement.)

So-called "clawback" strategies address cohort risk somewhat 
better, but leave a big question unanswered.  Where's the money 
to come from to finance benefits for cohorts that do poorly with 
their investment, if Social Security's not allowed to accumulate 
significant capital in the Trust Fund?  From tax increases on 
employees?  From benefit cuts imposed on other retirees?

[Some readers may wonder what "clawback" means.  The following 
formula is called a clawback:  "For every dollar the retiree 
receives from his PRA, his Social Security benefit is reduced 
by ninety cents."  Or seventy-five cents.  Or fifty cents.]

Finally, the biggest question of all:  Can future retiree 
benefits genuinely be protected with a private account strategy?  
Wihout imposing a permanent payroll tax increase?  Or requiring 
a permanent federal subsidy?  It seems unlikely. 

The Archer-Shaw proposal strives to deliver full current law 
benefits.  It treats personal accounts as an add-on to the 
existing 12.4 percent tax, and finances them with tax credits 
to all employees.  And, it is claimed, such personal accounts 
will eventually grow large enough that the payroll tax rate can 
be cut.

Such a claim is based on very shaky assumptions.  An extraordinarily 
high rate of return on PRA's is required, well above anything 
that's reasonable to assume.  If one sticks with empirically-
prudent assumptions about long-run real returns on the stock 
market, it's fair to say that the Archer-Shaw plan will result 
in a perpetual federal subsidy for Social Security.  

Isn't it fair to say, therefore, that the private account 
strategy continues to suffer from two basic flaws?  There's 
still a fair amount of retiree-borne risk that hasn't been 
squeezed out of the personal account strategy.   And there's no 
real way for a private account strategy to deliver full benefits 
to all retirees, short of a permanent federal subsidy, in an add-on
scenario, or a permanent increase in the payroll tax, in a carve-out
scenario.

Regards,

-Steve Johnson