DAILY SUMMARY May 21-22

[National Dialogue Moderator <moderator>]

    DAILY SUMMARIES FOR FRIDAY, MAY 21TH - SATURDAY, MAY 22,1999


PANELISTS' COMMENTS:

ROBERT D. REISCHAUER ("Some Responses) responded to the critics
who objected to the Burtless data as too biased by pointing out
that his original post described the example as "admittedly extreme."
He re-emphasized that the Burtless calculation did illustrate that
there could be large variations in replacement rates for different
cohorts.

While Mr. Reischauer acknowledges that the volatility of returns
could be reduced if contributions were invested in a balanced
portfolio of stocks and bonds and if annuitization took place over
a five year period, he points out that large disparities in
replacement rates for different cohorts retiring a few years apart
would still exist. He questions the political sustainability of a
benefit structure where retired 63 year olds receiving a 50 percent
replacement rate see their 69 year old brothers and sisters, who
made the same contributions and investments as they did, enjoy a
75 percent replacement rate. Mr. Reischauer also points out that
under many private account plans, which would allow workers to
invest in a wide range of assets that the replacement rate variation
would dwarf the "extreme example" he took from the Burtless study.

Mr. Reishauer next answered those privatizers who seized on the
low-end replacement rate of 40% in the Burtless study to argue that
he had proved the superiority of private accounts. He pointed out
that the returns on contributions in a mandatory pension system
are a function of the types of assets in which the reserves are
invested and the costs of administering those assets. If private
accounts were invested in the same type of assets their return
would be the same as Social Security's and conversely if the Trust
Funds were invested in diversified portfolio of private assets its
rate of return would equal the private accounts similarly invested.

Mr. Reischauer next addresses the "horrendous tales" about Social
Security's "miserable" rate of return for future cohorts in comparison
to a private account system.  He points out that the nation has a
huge unfunded liability to current retirees and to those approaching
retirement who could not hope to accumulate sufficient private
account balances to support an adequate pension. Because approximately
86% of current payroll taxes pays for today's benefits and if these
taxes are diverted to private accounts, the nation will need to
find other resources to meet its obligations to retirees.  These
new taxes will have a rate of return of minus 100 percent. He
suggests that " 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."

Mr. Reischauer posted some additional comments on May 22.  He
pointed out that the administrative costs for investing the Trust
Funds collectively would be very cheap, whereas present experience
provides no evidence that increased competition would lower the
management fees.  He notes that at present the average mutual fund
charge remains in the 110 to 130 basis point range while the fees
for administering an index fund are much lower.

He responded to a participant urging greater cuts in benefits that
the most recent COLA delay was a benefit cut, as is the increase
in the retirement age. He points out that last year the average
male benefit was $10,600 and given rent, food, clothing, transportation
and out-of-pocket medical expenses, this isn't much income to live
on.

With regard to future stock market returns, he points out that in
a global economy the returns on capital increasingly will be
determined by the marginal productivity of capital in the world.
In responding to Steve Johnson Mr. Reischauer agrees that we should
move to a fully funded system and that we should try to accumulate
a larger pool of capital.  However the only way to increase that
pool is by raising taxes, cutting benefits or the return on reserves
can be increased.

In response to ridgeway's post complaining that younger workers
have been screwed, Mr.  Reischauer points out that they do not have
to support their grandparent or parents in retirement or have their
mother-in-law live with them.  Many children have received college
educations that their parents could not have financed if they were
saving for their own retirements.   It is water over the dam that
the initial cohorts of retirees received benefits that exceeded
their contributions.

CAROLYN WEAVER discussed how the government could best invest the
surplus Social Security funds.  She discusses her views of a scheme
for centralized investment that Bob Reischauer favors - a government
-appointed board would invest in stock index funds like the Thrift
Saving plan for federal employees. She objects to such a centralized
scheme because the investment earnings would be credited to the
trust funds and not the workers. She points out that the advocates
of centralized investment have not always been clear about what it
would apply to.  Does it apply to the investment of new surplus
receipts or the investment of the reserve funds, the government
bonds currently credited to the trust funds?

In discussing potential government rules for investment in private
accounts she points out that how the government regulates personal
accounts can have a big impact on the choices made by workers.  If
the government shields workers from having to bear any investment
losses, she thinks it destroys the incentive to become an informed
investor and creates an incentive to invest unwisely. She responded
to a participant who raised the issue of government involvement in
investor education.  While she saw some role if the accounts are
large or the system is mandatory, she does not think it obvious
that the government would provide better or cheaper information
than the financial institutions competing to manage workers'
accounts.

On the 22nd Ms. Weaver also responded to questions from the public
and clarified the purpose behind her two questions.  She invited
participants to think more deeply about their own views and to
realize the kind of questions that policy makers grapple with.
She challenged a participant [ridgeway-5/21] who criticized her
for supporting a particular two-tiered reform proposal as a member
of the Social Security Advisory Council. After describing her
experience as a member of the Council she stated that her support
for the plan in question was a practical triumph. She also responded
to a May 21st question from Don Hutchison by agreeing with his
characterization of how FICA taxes are collected and credited in
the federal budget; she pointed out that the pay-as-you go nature
of the system generates disparate results for different cohorts
and this has led to greater concerns with the system's fairness.


PUBLIC COMMENTS FROM MAY 21TH - MAY 22RD.

Response to Carolyn Weaver's Questions:

--Market downturn question -Reed Davis answers that it depends on
what the private accounts are used for.  He sees a major problem
if the funds are to be used for basic survival; otherwise it means
a lower standard of discretionary income with account holders
getting by with a lower standard of living. Michael Jones responds
that since IRAs were enacted in 1978 the market has at times fallen
and these accounts have survived. It takes awhile to learn as an
investor that downturns are a fact of economic life and he personally
would welcome such an event because of the investment opportunities
it would provide. Tom Spens says as a successful investor for 52
years he has a hard time believing that the average investment
portfolio could yield an adequate retirement income.

--Governmental investment question -Reed Davis thinks it would be
preferable to pay down the national debt than have the government
invest collectively in the market.  Ridgeway would reluctantly
endorse a government investment board controlled like the Federal
Reserve or Fannie Mae to invest in indexed funds until such time
as the Trust Funds are eliminated.

--Federal Debt reduction and the Concord Coalition -Ridgeway and
Steve Wyman debated James about whether a recent 116 billion dollar
debt payment by the treasury was snake oil or real. The first two
viewed the payment as "snake oil" and cited material at the Concord
Coalition web site in support.  James responded that the Coalition
obviously supports debt reduction and would not align itself with
their argument. He next quotes Coalition Chairman Pete Petersen:
"What the privatizers neglect to say is that, unless Congress makes
up for the FICA revenue it loses, Treasury will have to borrow a
dollar from the public for every dollar invested in the new private
accounts. Such a "reform" merely shifts IOUs around the economy.
Like the Wendy's customer, we need to ask: "Where's the beef?" That
is, where are the additional savings, the additional funding,
without which reform is just a zero-sum game."

--Endorsement of new legislative plans -Richard Arnold ("Some
Politicians ") applauds various members of Congress for introducing
new reform plans creating a 2% carve out for private investment.
He applauds the bipartisan effort but wishes these bills moved to
a more complete privatization of the present system.

--Response to 5/21  Reischauer's Reactions -Michael Jones
responded to this post by arguing that increasing the rate of return
on the Trust Fund monies did nothing to ensure that as an individual
his retirement benefits would increase.  In responding to the
administrative savings that collective investment of the funds
produce, he argued that other values trump this administrative
efficiency.

--Reform system as a defined benefit plan.  A retired actuary, Andy
Lang, who is not a privatizer, argues that reform should lead to
making social security a defined benefit plan. At present he thinks
system only has first component, a defined benefit formula that
targets benefits where we want them. He advocates adopting the
other two, advanced funding of an actuarial nature and laws that
protect the system and the recipients. He points out that the trust
fund surplus is in reality the

--Clean up Private Investment System -Bob Weese suggested that
before we reform Social Secuirity the private investment system
needs to be reformed to clean up the hodgepodge of conflicting and
ever changing rules governing 401(k)s, IRAs and SEPs.

--Variation in Replacement Rates -Andre Dermant suggests an investment
plan to minimize the risk in replacement variations posed by both
Reischauer and James.

--Transition Costs  -Walter Hart advocates using the income tax
not payroll taxes to fund social security benefits for retirees
while transitioning to a private system.  He strongly objects to
the regressive nature of the payroll tax.


Barbara Brandon