Carolyn Weaver and others believe that the only way to achieve higher returns on Social Security reserves is to place these reserves in the hands of individuals who will invest them through personal or individual accounts. That approach raises some difficult questions such as:
1. Would personal accounts place an unacceptable amount of risk on some individuals who are ill prepared to bear this risk?
2. What would happen to the social assistance now provided by Social Security under a system of personal accounts? After all Social Security is the most effective and least controversial anti poverty program that the nation has. It helps boost the retirement incomes of those who had low earnings during their working years, survivors, spouses with limited attachment to the labor force, and divorcees.
3. Would administrative costs eat up a large portion of the returns in a system of personal accounts? Could such a system avoid excessive complexity?
4. And would such a system be politically sustainable?
I think the answers to these questions make personal accounts an inappropriate way to provide American workers with a secure source of basic retirement income upon which other types of retirement income-like pensions and personal saving-should be built.
Worker already have ample opportunity to invest for their retirement through tax advantaged vehicles such as 401(k) plans and IRAs that offer individual control. Everyone should take advantage of these saving instrumnents.
Ms. Joffe seems to believe that I think markets only go up. Not so. But in a down market, a collectively invested fund used to finance a defined benefit program would provide retirees with far more protection than would a system of individual accounts in which pensions would rise and fall with the market.
While some state and local government pension plans have engaged in directed and social investments, recent studies of this issue suggest that this is the exception not the rule. Those that did engage in such practices did not have the statutory safeguards that the president has proposed to ensure that political factors would not influence their investment decisions.
Contrary to Mr. Ridgeway's assertion, Vanguard and Fidelity--both great companies--do not manage their funds cheaper than the the federal government could do under a scheme of collective investment. The Advisory Council on Social Security, of which Ms. Weaver was a member, estimated that collective investment would cost about 1 basis point--that is 0.01 percent of assests--to administer. The commision estimated that individual accounts would cost between 10 and 100 basis points to administer depending on the nature of the accounts--the lower figure would be for a plan in which participants were offered only a handful of index mutual funds to chose among, the higher figure was for a system in which the participants could invest in a wide range of funds. The average mutual fund in the U.S. imposes annual charges that average over 1.2 percent of assets.
