DAILY SUMMARY May 18 - 19

[National Dialogue Moderator <moderator>]

Title: Daily Summary

Daily Summary

Tuesday-Wednesday, May 18-19

Panelists' Comments:

Robert Reischauer ("Second Shot") stated that personal retirement accounts do not provide a secure source of basic retirement income upon which other types of retirement income (such as pensions and personal savings) should be built. He suggests that personal accounts would place unacceptable risk on some individuals who are ill prepared to bear the risk; that it would jeopardize the anti-poverty function of Social Security; that administrative costs would eat up a large portion of the returns; and that it would not be politically sustainable. Workers already have 401(k) plans and IRAs to serve the purposes of personal retirement accounts.

He also stated that retirees would gain far more protection in a down market with a collective fund, compared to the direct impact of a down market on a retiree's benefits. He noted that "directed and social investment" practices of state and local government pension plans are the exception not the rule.

Finally, he disputed Mr. Ridgeway's assertion that Vanguard and Fidelity manage their funds cheaper than the federal government could do under collective investment. The Advisory Council on Social Security estimated that collective investment would cost about 1 basis point (or 0.01 percent of assets), that individual accounts would cost between 10 and 100 basis points (depending upon the range of investment options). The average mutual fund in the U.S. imposes average annual charges over 120 basis points.

Carolyn Weaver ("My Second Shot") responded to Reischauer's "Second Shot".

On the assertion that personal accounts place an "unacceptable risk" on individuals "ill prepared to bear the risk", she noted that all investing involves risks. The advantage of personal accounts is that they allow the individual to choose the amount of risk they want to take. With collective investing, the government decides the question of risk and imposes it on workers.

She also noted that the status quo also presents risks – the solvency risk. This translates into benefit cuts of the kind suffered by young workers from the 1977 and 1983 social security bills.

On the issue of administrative costs, Weaver stated that even collective investing would probably involve private management to avoid criticisms of politicized investment decisions by the government. She said private management would cost on the low end of the 10 to 100 basis point range cited by Reischauer, because the investments would likely be passively managed through index funds.

She also stated that, even with higher costs, the key issue is the net benefit (rate of return net of costs) and argued that those benefits will exceed the benefits under a patched up pay-as-you-go system.

She also addressed several public comments:

• Michael Jones is right. The topic should be titled "investing in private markets", not "investing in stocks". With private accounts, individuals can invest in stocks and bonds, and the appropriate mix would change as they age and their incomes and needs change.

• She challenged Gerald Leonard's use of the term "guaranteed" future income. Social Security benefits are not now and never have been guaranteed. Workers and retirees have no claim to a particular level of benefits in the future, independent of the law in effect in the future.

• On the issue of safety nets, she noted that the risks workers bear under a system of personal accounts depends not just on investment choices but also on the nature of the remaining social security system. She noted the difference between conservative proposals that fund personal accounts with only 2 percent of earnings, leaving in place a large social security system and (2) more ambitious proposals where personal accounts ultimately replace the retirement program, leaving a more limited safety net in place (e.g., the Supplemental Security Income program, which creates a means-tested benefit for the elderly poor).

Robert D. Reischauer ("More on Risk") acknowledged the risks of a fully funded, defined benefit system with collective investment of reserves (i.e., the potential for benefit cuts, increased taxes, etc.) but noted that those risks are managed through "our political system by our elected representatives". Such a system will likely ensure that the adjustments will be phased in gradually and shared broadly by taxpayers and beneficiaries.

By contrast, with individual accounts, the risks are borne directly by the individuals. He noted that the risks can be reduced by restricting permissible investments to less risky options, but the remaining risks are still too large for a program intended to provide the foundation for retirement income. The risks of IRAs and 401(k) plans are accepted because people expect to receive an inflation-protected basic benefit from Social Security.

He also notes a study by Dr. Gary Burtless, which showed that the same earnings and investment practices of similar workers would produce substantially different benefits, depending solely upon the performance of the stock market over the years at issue.

Carolyn Weaver ("Personal Accounts, Risk, and Replacement Rates") responded to Reischauer's comments on Tuesday about the Burtless study. She noted that the study assumed that workers invested solely in stocks – while people hold a mix of stocks and bonds and increase their holdings of bonds as they get older. Second, the Burtless study assumed that workers convert the full value of their investment funds into life annuities at age 62 – regardless of how favorable or unfavorable market conditions are that day. There are better ways to manage the risks of withdrawing retirement funds.

She also disputes Reischauer's contention that a system with volatile replacement rates will be politically unsustainable. She stated that the returns with personal accounts depend, in large part, on investment decisions made by the individual and that the differences in replacement rates will also depend upon such choices. Differences in the replacement rates that are ultimately achieved from various sources of income are little cause for alarm.

A widespread decline in expected retirement incomes due to generally depressed market conditions is more significant and raises problems for investment-based systems and pay-as-you-go systems.

She also said that the pay-as-you-go system suffers from the problem of people contributing at the same rates but receiving different benefits – due to such factors as their marital status, the number of children, retirement ages and other factors.

Public Comments from Tuesday-Wednesday, May 18-19

The public commenters asked aggressive questions but thanked the panelists for providing direct answers:

Higher Returns from Investing in Stocks?:

-- Robert Randall ("Investing in Stocks") suggests that a personal account system is inevitable but states that taxes should not be used to fund personal accounts before the unfunded accrued liability of Social Security's basic benefits is resolved. He also stated that the additional returns earned from collectively investing the trust fund reserves will become negligible as future retirement benefits draw down the reserves.

-- Marvin George ("Investment in Stocks") asked that two points be addressed: (1) referring to Alan Greenspan's statements, if politics influences investment decisions, returns will be reduced by two percent; and (2) if trust fund reserves are invested in private securities, the Treasury will have to pay higher interest rates on its borrowings.

-- Jeremy Kidd ("investment") asked the panelists to address Chairman Greenspan's testimony before a Congressional subcommittee, in which Greenspan stated that the investment of Trust Fund moneys in the stock market would result in a net gain of 0 percent. He asked how the system could be designed to change the scenario to a "positive sum game."

-- A few commenters discussed the Burtless study, cited by Reischauer. Richard Arsinow ("Re: More on risk") agreed with Carolyn Weaver's comments that the 100 percent asset allocation in stocks assumed in the study is unrealistic. He also cited a SSA publication at http://www.ssa.gov/pubs/10006.html which, according to Arsinow, states that Social Security intends to provide a replacement rate of 42 percent at normal retirement age, or 33.6 percent at age 62 for the average worker. He argues that these numbers are equivalent to or lower than the worst numbers from the Burtless study. Ridgeway (Re: More Responses/Questions) also made this latter point.

-- Steven Johnson ("This ought to be a 'Both-And' issue") challenged Reischauer's definition of three ways (cut benefits, raise taxes, increase rate of return on reserve trust funds) to avoid Social Security's insolvency. He suggested a variant of the third option -- to increase a substantially larger pool of capital to raise the total returns. He suggests doing this with a combination of reduced benefits, increased wage base and a temporary subsidy (as proposed by President Clinton). He suggests investing the funds through investment managers who would receive funds in proportion to their popularity with individual Americans. He would also require the managers to vote the stocks they hold.

Administrative Costs:

-- Al Abbott ("Re: My second shot") agreed that the benefits of personal retirement accounts will justify the higher administrative costs. "[W]e will have immediate ownership of the funds, they will not be subject to bureaucratic whims, the returns (even with the administrative costs) will far exceed anything that Social Security will pay out."

-- Mike Mason ("Management Fees") suggested an additional reason why the costs of private investment management fees would be low: competition will keep prices low or cause managers to lose market share.

Risks:

-- William Grazier ("When are we going to Discuss Social Security???") noted the advice of experts: "Do not put your grocery money in the stock market!!!" He said investing in the stock market will not protect anyone from poverty in their retirement years.

-- Several commenters (e.g., Stephen Wyman, "Opening statement -- investment in stocks, bonds, etc.") noted the losses incurred by Orange County, California, using "a well known brokerage house".

-- Ridgeway ("Responses/Questions to Mr. Reischauer et al.") asked how the current balance in the Trust Fund compares to the net unfunded liabilities. He said individuals should be free to choose how much risk they want to bear. He asked why state government employees with their own retirement systems want to stay out of the Social Security system. Others said there are ways to manage risks.

-- Bill Larsen ("Re: More on Risk") challenged Reischauer's comment that our system of elected representatives will spread the risks of investing fairly, among taxpayers and beneficiaries. He asked whether Congress has ever required beneficiaries to share the risks, except for a one time delay in the Cost of Living Adjustment.

Related public comments:

President Roosevelt's Intent

-- James ("Opening statement -- investment in stocks, bonds etc.") quoted from President Franklin Roosevelt's January 17, 1935 Message to Congress on Social Security that proposed three principles for the social security program, which support a combination of compulsory and voluntary contributions by workers:

In the important field of security for our old people, it seems necessary to adopt three principles: First, noncontributory old-age pensions for those who are now too old to build up their own insurance. It is, of course, clear that for perhaps 30 years to come funds will have to be provided by the States and the Federal Government to meet these pensions. Second, compulsory contributory annuities which in time will establish a self-supporting system for those now young and for future generations. Third, voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age. It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans.

http://newdeal.feri.org/speeches/1935b.htm

Others:

-- Several commenters (Al Abbott) stated that collective investing of the Trust Fund's reserve funds would politicize the economy by permitting the government to own a substantial portion of private enterprise.

-- Michael Jones ("Re: Responses/Questions to Mr. Reischauer et al.") discussed the present practice of investing excess FICA taxes in treasury bonds. He questioned whether these bonds constitute "real investments." He said the practice requires the government to raises taxes in the future to pay the loans back with interest.

-- Two other commenters questioned whether the debt held by the Social Security Trust Fund is part of the "National Debt".

Ashley Schannauer