7% Stock Returns: Reply

[National Dialogue Moderator <moderator>]

    This reply is in response to Mr. Johnson's post about forecasting 7% returns
on stocks.

    I am pleased to have the opportunity to respond to this, to reiterate the
point that neither our proposal, nor the Kolbe-Stenholm proposal, relies on any
such forecast. The proposals that rely upon particular forecasts for stock
returns are those that either invest the Trust Fund in the stock market, or
those that base the Social Security defined benefit outlay on the accumulation
in a personal account, requiring some prediction as to the level of
accumulations in those accounts.

    Both the Senate bipartisan proposal and the Kolbe-Stenholm proposal would
balance the traditional finances of the system.  Neither proposal contemplates
any particular return on stocks, nor any particular role for stocks in an
individual's investment portfolio.  Calculations performed by objective scoring
agencies show that the advance funding built into our programs would improve the
overall investment deal for future beneficiaries for the full range of outcomes
in personal accounts, from receiving the Trust Fund's own projected bond
interest rate on up through the historical rate of return on stocks.  Simply
because of the advance funding in our plans, overall rates of return improve.  A
young single male under the current system would only experience a 0.6% rate of
return on his payroll taxes, and a negative rate of return when the impact of
general tax revenues is included in the calculations.  Accordingly, the mere act
of moving to some advance funding enables his rate of return to go up from this
negative value, whether one assumes investment in stocks or not.

    Plans that make no explicit outlay changes other than to re-invest Social
Security money in the stock market have this sort of dependence on stock rates. 
If that rate of return does not pan out, these plans become insolvent.  Our plan
makes the necessary changes to balance the traditional system and does not
suffer from this problem.

    I fully share the concern that the solvency of the system should not be
banked on a presumption of 7% return or any other rate of return on stock
investment. However, it should also be noted that this figure is most frequently
thrown around by opponents of personal accounts, even when arguing against
proposals that do not make reference to any such figure.  It is a valid concern
with respect to proposals for which solvency depends on a presumed rate of
return in these accounts.  However, this does not apply to our proposal, to the
Kolbe-Stenholm proposal, to the Moynihan proposal, or any of a number of other
plans that have been put forward.  

    Senator Judd Gregg