Some reactions to a few of the comments

[National Dialogue Moderator <moderator>]

		Some reactions to a few of the comments


A number of participants in the debate have jumped on my *admittedly
extreme example* of the variation inherent in a defined contribution
system.  I used an extreme example to illustrate more clearly the
general point, not because I thought it was a realistic prediction
of the future.

While the volatility of returns would be reduced if contributions
were invested in a balanced portfolio of bonds as well as stocks,
as the proposal put forward by Chairmen Bill Archer and Clay Shaw
calls for, and if annuitization took place over the five year period
preceding retirement rather than in the year the worker turned 62,
the estimates that my colleague Gary Burtless has done of these
variants show that there are still very large differences in
replacement rates for cohorts retiring just a few years apart.
Retired 63 year olds receiving a 50 percent replacement rate may
pressure the government for additional benefits if their 69 year
old brothers and sisters, who made the same contributions and
investments as they did, are enjoying a 75 percent replacement
rate.

Many private account plans, including the one crafted by Carolyn
Weaver, would allow individuals the flexibility to invest their
account balances in a wide range of assets, a range similar to that
permitted for IRAs, rather than require them to purchase shares in
stock or bond index funds.  If workers had such latitude, the
variation in returns within a cohort of workers would dwarf the
variation provided in my admittedly extreme example.

It would be wrong to draw inferences about the political consequences
of volatility in a mandatory pension scheme from one's experience
with TIAA-CREF or a 401(k) plan.  Participation in employer-sponsored
plans is voluntary.  Some workers choose not to participate, some
choose to supplement their employer's minimum contribution.  So
there are many factors besides market performance that determine
whether one worker gets more or less than another.  More importantly,
workers' concerns over private pension variability is reduced
because everyone has a source of secure, predictable, inflation-protected
retirement income - namely Social Security - that serves as the essential
foundation upon which other more volatile sources of income can be
built.  Replace that secure foundation with a less certain one and
the political dynamic will change.

Some participants in the debate noticed that the *low* replacement
rate in my example - 40 percent - looked pretty good compared to the
replacement rates provided by Social Security which requires
contributions over twice the level - 12.4 percent of earnings versus
6 percent of earnings - of the illustrative private account.  Did I
shoot myself in the foot?  Did I prove the superiority of private
accounts?  The answer is no so restrain your glee and read on.

The returns on contributions made to a mandatory pension system
have nothing to do with whether the system's balances are held in
individual accounts or held in a collective trust fund.  They are
a function of the types of assets in which the reserves are invested
and the costs associated with administering those investments.
Under current law, we require that Social Security reserves be
invested in special Treasury securities which have a relatively
low yield.  If we required that private account balances be similarly
invested, their gross rate of  return would be the same as Social
Security's.  Similarly, if we let Social Security invest in a
diversified portfolio of private assets, as the president has
proposed, its gross rate of return would equal that of private
accounts so invested.

Administrative costs would be less for reserves that were collectively
held and invested than for reserves that were divided among 150
million individual accounts.  The former might cost about 1 basis
point, the latter anywhere between 10 and 150 basis points depending
on the details of the individual account structure.  So the net
return would be greater for collectively held reserves assuming
similar asset investment.

How does this square with the horrendous tales you have heard about
Social Security's miserable - about 1 percent for future cohorts - 
rate of return?  What is often left out of the paeans for private
accounts is the unfunded obligation the nation has to current
retirees and those approaching retirement who could not hope to
accumulate sufficient balances in a private account to support an
adequate pension.  Roughly 86 percent of the payroll tax money
workers send to Social Security goes right out the door to pay
benefits to their mothers, grandfathers and other retirees.  It
isn't available for investment and its rate of return is minus 100
percent.  If payroll taxes are diverted into private accounts, the
nation will have to come up with other resources to meet its
obligation to retirees and these taxes similarly will have a rate
of return of minus 100 percent.  Anyone who wants to compare the
return provided by the current system with that of a *new and
improved* system has to calculate a weighted average of the return
on the assets held by the new system and the minus 100 percent
return on the contributions made to meet the unfunded liability
for current retirees.  Once you've done this, the difference that
will remain will relate to restrictions placed on permissible
investments and administrative costs.

Robert D. Reischauer 
The Brookings Institution