I have to say that I am very impressed with the participants in the discussion who both are well informed and argue their cases well - unfortunately, they are usually arguing against me! Well, not to be beaten down, let me provide a few more responses.
Management Fees Collective investment of the reserves for a defined benefit pension plan is very cheap - 1 basis point is the estimate - because there are not millions of individual accounts to manage. The government, of course, would not invest directly. It would competitively bid the job out to private fund managers.
While it might be reasonable to expect that management fees for individual accounts would be competed down, the recent experience with mutual fund fees provides no evidence that this would be the case. The average charge remains in the 110 to 130 basis point range. Purchasers of mutual funds appear to be remarkably indifferent to the level of fees they are charged. Charges can be minimized by requiring that accounts be invested in index funds which are cheaper to administer.
Benefit cuts: Yes Mr. Larsen, there have been benefit cuts in the past. The COLA delay was a benefit cut for all those receiving benefits when it took place. The increase in the age at which unreduced benefits will be paid, which will affect those reaching age 62 in 2000 and beyond, is a benefit cut. And there have been reductions in the minimum benefit, the benefits for workers and their spouses who receive nonparticipating state and local or federal CSRC pension benefits, and benefits for post secondary school dependent students.
To be sure, most of the adjustments have taken place on the tax side - possibly because benefits are fairly modest. Last year, the average male worker benefit was roughly $10,600. When one thinks of what it costs for a retired person to rent an apartment, buy food, clothing, and transportation and pay out-of-pocket medical expenses, that isn't very much. We can say that Social Security should be just one leg of the three legged retirement income stool until we are blue in the face - the fact is, most retired people are heavily dependent on Social Security (one-third derive three-quarters or more of their income from the program),
Back casting: It is wrong to evaluate the plausibility of privatization schemes by looking at past GDP, market capitalizations, and the balances of hypothetical individual accounts by back casting. If a PRA system had existed since the 1870s, national saving would have been considerably higher, national investment would also have been greater and the GDP and market capitalizations would have been much larger. With all this investment the returns to capital may have been less and returns to labor a bit higher. So the average returns on stocks might have been lower but the level has little to do with the volatility. The Burtless analysis would hold whether the average real return on stocks was 7 percent or 4 percent.
Future stock market returns. Looking forward, we have to remember that we live in a global economy. The returns to capital increasingly will be determined by the marginal productivity of capital in the world. GM, GE, Microsoft, Cisco Systems and most major companies invest abroad and sell abroad. So before we conclude that the projected slowdown in U.S. growth - one that will be related to the slower growth of the labor force - necessarily implies that the historic returns on stocks can not be used to estimate the future returns on PRAs or collectively invested trust fund reserves, we should look beyond our borders.
Is there another way? Steve Johnson suggests that another solution should be added to my *raise taxes, cut benefits, or raise the rate of return* list. He recommends *accumulating a larger pool of capital.* I agree, and strongly favor moving to a fully funded system. But the only ways to build that bigger pool of capital, whether it takes the form of larger trust funds or bigger balances in PRAs, are the three I listed.
Young workers have been screwed! Mr. Ridgeway's succinct evaluation of the situation. Another way to look at it is to say that the young workers didn't have to support their parents or grandparents in retirement or didn't have to watch their older relatives live out their final years in poverty or didn't have their mother-in-laws living with them. Furthermore, the parents of many of these younger workers were able to provide their children with advantages - possibly a college education - that would have been unaffordable if their parents had been required to fully fund the adequate retirement benefits they subsequently received. In any case, its water over the dam. For societal reasons, we decided to provide the initial cohorts of retirees (those retiring from 1940 through to the present) with benefits that exceeded those that could be justified by their contributions. Had we not done so, America would be a very different - and much less pleasant - place today.
