Cong. Sanford's Response to S.Johnson

[National Dialogue Moderator <moderator>]

    Cong. Sanford's Response to Steven Johnson's Questions for Privatizers



	Johnson: 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.

	CONG. SANFORD'S RESPONSE: My bill utilizes the 401(k) model and 
efficiency gained through high volume to lessen administrative fees.  By 
having people choose plans, with 5-15 investment options, where the only 
options are how to allocate assets among the options, entire plans can be 
invested as one large account.  This is not recreating the wheel; it builds 
entirely upon the 401(k) model, and it will not be difficult for the 
financial sector to broaden the 401(k) and IRA infrastructure to administer 
PRAs.
	 Since there will be one single rebate per year as opposed to 
thousands of small payments coming in throughout the year, costs will be 
further lowered.  This is done without completely sacrificing choice, since 
workers would be free to choose their plan administrators and the plans in 
which to enroll.  We also encourage additional contribution rollovers of IRAs 
and old 401(k)s to promote asset accumulation to further defray per capita 
costs.  To protect low-wage workers, the government will, as a permanent 
budget line-item, pay the administrative fees for those workers.


	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.

CONG. SANFORD'S RESPONSE: Because the rebates under my plan are early payment 
of future benefits, the progressivity of the system remains intact.  In fact, 
my bill enhances the progressivity of Social Security for four reasons.  
1) As with any personal accounts plan that does not force the purchase of an 
annuity, personal accounts disproportionately benefit the poor.  Since blacks 
and lower-income workers have shorter life expectancies, they get 
shortchanged by the current system's strong link between longevity and 
benefits
 
2) Approximately the lowest 20% of average lifetime income earners will 
receive no reduction whatsoever in monthly government benefit checks in 
retirement, plus they get to keep every penny in their accounts.
In other words, the rebates will not be considered early payment of future 
benefits for these people.  The normal benefit offset-rebates being 
considered early payment of future benefits-would be phased in over the next 
15% or so of average lifetime income earners.  

3) In the first two years a low-income earner has an account, he or she would 
receive up to a $300 automatic refundable tax credit, in addition to the 
rebate.  This will allow low-wage workers' PRAs to quickly get to $1,000, the 
magic number for reasonable administrative fees.  

4) The government will pay the administrative fees (not the mutual funds' 
assets-under-management fees) for low-income workers.


	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.

CONG. SANFORD'S RESPONSE: Because our benefit offset-rebates would be 
considered early payment of future benefits -- using present value 
calculations -- the impact of when contributions are made to the account is 
neutralized.


	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.

	 	CONG. SANFORD'S RESPONSE: Our bill has a special protection 
for women, who as widows are the most likely to 'outlive their assets.'  At 
retirement, the higher earner of a married couple would be forced to purchase 
a survivors' annuity that would guarantee that should the higher earner die 
first, the offset government benefit plus the survivors' annuity would have 
to equal at least
current law survivors' insurance benefits.
	 	As for other situations, individuals are best able to make 
decisions for how to handle retirement income.  Some may want to live 
frugally in retirement and leave as much as possible to their kids and 
grandkids.  Some might want to guarantee a monthly income and might purchase 
a sizable life annuity.


Rep. Mark Sanford