Responses/Questions to Mr. Reischauer et. al.

[ridgeway <riridgew@nyx.net>]

TO: James <jamesk_51@hotmail.com> 

Thanks for posting into the debate another reference to 
a very good article by Sowell.  Mr. Sowell is correct
in his descriptions of the operational meaning
of the concepts currently used by bureacrats
and politicians when they speak --- they
are using "Unified" budget lingo.  This 
lingo does in fact only count debt
held by the public (not the federal
government debts to itself) as the "National Debt".
It's the same game as saying we have a "Budget Surplus"
--- true when viewed from a "unified" point of view,
but false when you recognize that the the SS trust
fund surplus has to be used to mask a deficit in the
other section of the total government budget.

----------------------------------------------------------
   TO: phyllis joffe <pjoffe@aol.com> 

   That's right, the first people to
   'join' SS were not those born in
   the 1930's. It is also not what Sowell said.
   The generation of the 1930's includes also
   those who were alive and working then!!!!
    
   You say those that sell annuities make
   money off them -- I say great!  If they
   didn't make money off them, they wouldn't
   be a supply of them for people on the 
   other side of the transaction to buy.
   You say annuities have fixed and low
   returns --- compared to what? To
   social security returns that I might
   get? NO WAY! One of the key rules of
   being a financial analyst is that you 
   have to make some comparisons.  In 
   politics they say "you can't beat
   something with nothing".  However,
   with SS, MANY will get negative
   real rates of return, thus they
   would be better of with NOTHING!

   Indeed money is only a score-keeper.
   True --- the money scored in my junk bond
   accounts measure the returns I get
   to help finance key Telecommunications
   infrastrures (e.g. TCI cable companies,
   Nextel, McCaw, cell phones networks, 
   etc..., and Fidelity High Yield fund
   has done pretty darn good over the
   years!).

   You say the financial stability of the
   SS program was been negatively impacted
   by politicians that have 'dipped' into
   the SS funds.  I agree.  But for different
   reasons.  I don't doubt that the bonds
   held by the SS funds will be "payed" back.
   The problem is that the funds were indeed
   'dipped' into by the politicans when they
   promised, and delivered, benefits in 
   excess of fair value (i.e. adjusting contributions
   for interest rates and mortality statistics, etc...).
   For example, my memory recalls that 
   our panelist Robert D. Reischauer made
   a speech to the Concord Coaliation back
   in the first week of April 1994.  He
   indicated that the average receipient
   of SS in that year received excess
   benefits of about $2,100 per year
   (he also gave the number for excess
   Medicare benefits of about $3,800 per year).
   That's the problem!  Prior generations
   voted for politicians who promised them
   (and delivered!) on those promises to 
   early entrants into the SS system!!!
  
   
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TO: Robert D. Reischauer 
First I want to thank you for actually reading 
the posts and responding to them.  I hope Ms.
Weaver will be as engaged and resposive. 

Below I have included your post
and will give my take on it.  I've asked
questions along the way and they are marked
with several questions marks "????????????..."
so they can be easily spoted in the narrative.
Some of the questions are aggressive, however
they are not posed as simply rhetorical questions.

>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.  

    I don't think that is what she said --- 
    clearly private accounts are not the "only" way.
    For example, I do not doubt that compared
    to the current SS system that your proposal
    would NET an increased rate of return for
    SS balances.  However, private accounts
    are the "only" way to provide for 
    individual freedom with private ownership,
    to privide greater insulation to prevent
    politicians from 'dipping' into SS funds.
    And, Mr. Reischauer, I'd like to officially
    ask you how the current balance in the SS
    Trust Fund (~$800Billion) compares to the
    present values of the net unfunded liabilities
    of the current SS system?  Back in January
    Milton Friedman had an article in the NYTimes
    that indicated that these current unfunded
    liabilities are somewhere between $4 Trillion
    and $10 Trillion.  So this whole debate, is 
    in a certain sense, just nipping at the edges
    of the BIG SS problem.   Questions: 
    Do you agree with that, this debate is
    only nipping at the edges of the financial
    problem??????????????? What is your estimate
    of the unfunded Liablities of the SS system??????????
    How about the bigger problem of Medicare?????????????

    I submit the more important debate is on the
    meaning of FREEDOM and of fiscal responsibility
    to ensure that our experiment in self-governement does
    not perish from the face of the earth ---- be sure
    and humm the Battle Hymn of the Republic when
    you read that. :-)

> 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?
      
             "Some individuals" --- probably.  There will always
             be fools! Who was it that said something like "you can 
             fool some of the people all of the time".  Some people
             drive drunk and kill people, based on this --- why don't
             we take everybody's car away and give them a bicycle?
             I suspect there will be fewer deaths, i.e. less risk!
             But I bet there will still be some deaths even
             from bicycles!  LIFE IS FULL OF RISK.  WITH 
             RESPECT TO INVESTING, YOUR OR ANYBODY ELSE'S
             RISK AVERSION SHOULD NOT BE A BASIS TO LIMIT
             ***MY*** PERSONAL FREEDOM WITH *MY* INCOME!
             If you want less risk, invest in short term
             Treasury bills!  Let that be one of the may
             options people can be Free to Choose from for
             personal SS accounts --- but be advised, less
             risk is signficantly correllated with less return.
             I know this since my personal investments
             have been on the conservative side --- but that's
             my choice, not yours.  


>	 2. What would happen to the social assistance now provided 
>           by Social Security under a system of personal accounts? 
             
            Welfare like Medicaid, Food Stamps, etc.  Explicitly
            out in the open in the budget, not in some SS convoluted
            income replacement schedule.  That's where it should be!   
 
>            After all Social Security is the most effective and least 
>            controversial anti poverty program that the nation has. 
             
            Is it?  SS is going bankrupt and there seems to be some
            controversy going on right here and now!    
 
>            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.
  
             It helps boost the groups you listed by lowering
             the NET income of others like young workers!!! The 
             poverty rate among the older age groups has decreased 
             as the poverty rate has gone up for young people
             --- transfer payments are a zero sum game.  And lets
             be a little more specific --- it help on NET
             the early entrants of SS, and very well too!
             But is the NET benefit going to be there for
             future generations?  Will it be an equal NET
             benefit as previous generations (i.e. adjusting 
             the contributions and benefits for the time 
             value of money and mortality statistics)?
             

>	 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?
             
           This is my response to the reply you directed
           to me at the end of your post.  I'm not in a position 
           to debate this, but I don't believe that the full 
           cost is included in SSA figures; however, 
           for the purposes of this debate, and this debate 
           only, I'll accept your representations.  Plus, based
           on seeing you on C-SPAN and reading some of your
           works I don't think you would knowingly lie.  

           The key is what is the NET impact, the NET Internal 
           Rate of Return over a lifetime.  Some funds (e.g. 
           Kaufman fund) have high fees --- but if the NET result
           after fees yields a high rate of return compared
           to the alternative (in this case SS rates of return),
           who cares?  I submit that the expected
           rate of return from even a relatively conservative
           mutual funds would NET most individuals better 
           returns than can be expected from the SS system.
           I just looked up Fidelity Magellan's performance.
           Their total NET internal rate of return over the
           last 10 years was just over 19 percent. 

           Questions:
           With your system of nationalized accounts, can I rationally 
           expect that my demograhic group will achieve a 
           Life-time-Internal-Rate-of-Return from SS contributions 
           (single, no kids, male, wage income: between average and
           max wage income subject of SS Taxes, born mid 1950s)
           will be greater than or equal to just a 3 percent
           real rate of return (the long term rate for government
           bonds)?????????????  If not, why not????????????????
           Is that "fair"????????
           
           By the way if the Social Security system is such
           a wonderful-wonderful-wonderful good deal, why
           are state government employees fighting to 
           keep their separate pension systems?  For example,
           I find it strange that Senator Barbra Boxer
           (D-Ca) would be agaist individual SS accounts
           while at the same time support her California
           government workers in their quest to keep 
           from being sucked into the SS system as the
           administration would like.  Question: Could you
           please explain this??????????????????????????
           
           As for as "excessive" complexity ---
           the answer is clearly no --- I will only respond
           by pointing out the ease of IRAs, 401Ks, mutual
           funds, etc....  perhaps the complexity you are
           looking at is how do liberals recapture the
           income redistribution system they currently
           have with SS --- in that case it would be
           complex for them to get it back, but that's
           the damn point!!!!!!!!!!!!!!!!!!!!!!!!!!!

>	 4. And would such a system be politically sustainable?

            Is the current system politically sustainable? NO.
            More important than that, is the current system
            financially sustainable?  NO --- the SSA says
            they see a date in the future were they can pay
            only about 75 cents on the dollar of promised
            benefits.

            Compared to the current SS system, Personal SS accounts
            are more sustainable politically AND financially.

>
>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.
  
Frankly, I think the reason Liberals don't want Personal SS
accounts are for two reasons:
    (1) the political opportunist (of both parties) loose 
        some of their political power they have in manipulating 
        the electorate via the distribution of net SS benefits.
    (2) the true Liberals (of both parties) would loose some of 
        their ability to use the force of government to
        implement "from each according to ability,
        to each according to need."  
To be honest, as I have said before, one of the basic reasons I 
favor private SS accounts is to remove both of the above options!!!

>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. 
 ^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^^
 I do --- but I want to do it even more with the very
 dollars that I'm FORCED to give to Social Security.
 Last Question: Why do you limit my individual Freedom 
           by forcing me to fund a system like SS
           rather than redirecting this income to where
           I would prefer it to go????????? --- I think
           I know better what's best for me and I think
           you know what's best for you.  Sooooooo you
           invest that component of your income represented
           by your SS contributions as you'd like and I'll 
           invest mine as I'd like --- that's sound "fair" to me. 
           For the record, I'd would prefer my SS 
           "contributions" to go to other real currently 
           available retirement alternatives controlled
           and owned by me --- not politicians.  I'll
           trust Mr. Vogel at Vanguard ANY day over
           any politician --- even Honest Abe Lincoln
           Hummm Hum-Hum Hum-Hum Hum Hummmmm Humm.... :-)                      

> [snip the comments directed to Joffe and myself...] 
----------------------------------------------------------------------

  Again, I'd like to thank you for taking the time to get involved 
  in this --- we clearly disagree on the basics, but I appreciate
  your input.  Thanks.  I look forward to your responses.
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