From: Richard Arsinow <richard.arsinow@rauland.com>
Subject: RE: Second shot
First, in response to your questions:
1. Please look at the success of the Federal Employees' FERS program. It offers a limited number of professionally managed funds from which to choose. Employees may at first have been intimidated by the choices they needed to make, but there was considerable help available to make those choices. I do not have figures on the administrative costs, but I have never heard them being criticized as being too high. Some proponents of individual accounts suggest that the accounts for the general public could be patterned after FERS, at least initially.
2. Proposals to create individual accounts include a minimum retirement income, and provisions for any shortfall in an eligible individual account to be made up by general revenues at retirement time. In this way, the country as a whole supports this measure to keep retirees out of poverty, rather than forcing other wage-earners who are trying to save for their own retirement to fund it. It is true that by putting each wage-earner's payroll deductions into his or her own account, we do not take funds from better-paid workers and transfer them to lesser-paid workers, but it is not universally agreed that such transfers are fair to all participants or are the right thing to do. By simply following the default or suggested fund choices (selected by investment experts from the fund choices available, and based on the age and family status of the participant), it is projected that all participants, even those who under Social Security would be on the receiving end of the "income boost", will do better than they would under Social Security. Survivors would be treated better than under Social Security. In a marriage in which both spouses had good lifelong careers and where one of the spouses dies before collecting benefits, under Social Security the surviving spouse may collect either the deceased spouse's benefits, if they are greater, or his or her own benefits. One complete set of benefits is lost forever. Under a system of inheritable individual accounts, the surviving spouse's retirement would have the benefit of both. Since spouses with limited attachment to the labor force would naturally be expected to receive lower retirement benefits, it makes sense to allow them to maximize the benefits from the contributions they do make. Tax-free compounding and the option to make voluntary additional contributions would assist this effort. Divorce settlements involving retirement income will always be complicated. At least, with a system of individually-owned accounts, both spouses' account values at retirement will be known.
3. As I stated above, I have not heard criticism of the FERS program as far as administrative costs are concerned. I would agree that the estimated cost to each individual account would be in the range of 10 to 100 basis points, but what would we get in a collective system for 1 basis point? The staff would necessarily be small, and the decision-makers very powerful. This leaves the door open to corruption, conflict of interest, and excessive government influence on the market.
4. If the system is self-contained, perpetually self-funding, and separate from the taxing and budgeting process, it certainly would be politically sustainable, because it would be far less political in nature.
All of your stated concerns have been addressed by others in this forum. But what about the significant disadvantages of a collective approach?
*We would likely still be saddled with a defined-benefits program. There would be no opportunity for individuals to do better than the official benefit levels. If the program does well, it can better cover its future liabilities, but it is unlikely to share the improved return with those who were working while it was realized. We will be locked into the current dismal return on contributions.
*Workers will be denied the opportunity to watch their retirement savings grow. Ask participants in 401(k) plans and FERS if this isn't an incentive to work hard and keep contributing. Now ask people how they feel about their contributions to Social Security.
*We will still have rules such as the either-or surviving spouse rule, which take from some participants and give to others, and can never be made completely fair to all.
*There can still be no assurance that the program will be self-funding in the long term. As such it will still be tied to possible benefit cuts and wage tax increases, and will be more political in nature.
*Retirement age will continue to be set by formula and not by individual circumstances. One of the most attractive benefits of individual accounts is that, provided sufficient resources have been built up, the individual decides his or her own retirement age.
In summary,
>The investment education barrier can be sufficiently overcome.
>Everyone should do better than under Social Security, but there will be a safety net.
>Not everyone agrees with the current redistribution of funds.
>Survivors will likely do far better than under Social Security.
>Partial-career workers deserve the best shot at compounding.
>Administrative costs of 10 to 100 basis points would be well spent for the potential accumulation individuals could achieve.
>The perpetual self-funding would shield the system from politics.
>Most, if not all, would do better than under the defined-benefits program.
>Watching the savings grow is a powerful incentive. People will feel good about the system.
>Restrictive rules will be at a minimum.
>The individual, not the formula, will set retirement age.
