My Questions
- Date: Tue, 25 May 1999 10:41:09 -0400 (EDT)
- From: National Dialogue Moderator <moderator>
- Subject: My Questions
- Contributor: PANELIST: Carolyn Weaver
MY QUESTIONS
The questions I posed earlier were, as I indicated, intended to expose to
some proponents of personal accounts possible weaknesses or inconsistencies
in their thinking. (An ulterior motive was to elicit comments from new
participants whose views were not yet formed. Forgive me for not wanting to
spend two weeks preaching to the converted!) Given my limited success, I
will offer only a few brief observations of my own.
First, as to the impact of another Great Depression or a sustained period of
poor stock market performance (coupled with poor economic performance
generally) on a system of personal accounts--
-- The likelihood of another Great Depression-type event is generally
regarded as quite low. A replay of a 1970s-type event is not so low.
-- The kind of economic problems experienced during either event
would wreak havoc on any pension plan--public or private, defined benefit or
defined contribution. A public defined-benefit program like social security
would quickly become insolvent on a cash-flow basis--as it did during
1970s--and require rather immediate tax increases and/or benefit reductions.
Personal retirement accounts (which are defined-contribution pensions) would
remain solvent and all accounts would still be "fully funded." A system of
personal accounts would not "collapse." Asset values would be depressed,
however, as would expected retirement incomes for those close to retirement.
-- Depending on the length and severity of the downturn--and on the
nature and financing of the government safety net--subsidies to older
Americans may result. Size and nature of possible subsidies, if any, would
be evaluated given realities of the situation rather than the potentialities.
Decision would be influenced by the resources available and the competing
priorities of citizens at that time, as well as by how much of social
security had been converted to personal retirement accounts and the nature of
the remaining program.
-- Markets rebound and, when they do, workers with personal
investment plans--whether a company 401(k) plan, an IRA, or a system of
personal social security accounts--are able to capture the benefits of rising
asset values. And as several participants have noted, with history as a
guide, workers can expect to generate healthy investment returns even with
relatively short time horizons. (All the more reason to allow retirees the
flexibility to keep their funds invested if they wish.) If social security
were maintained as it is now designed--or as it would be with centralized
investment--a sustained period of poor economic performance, superimposed on
the long-term demographic picture, would result in permanent losses of
lifetime social security "wealth" for workers and possibly even for retirees.
-- Social security--either the system we have or the one we would
like to have--is not the only federal "safety net" that would come into play
during a period of poor economic performance. We have the Supplemental
Security Income program for the elderly (and disabled) poor, the Food Stamp
program, Unemployment Compensation, and Medicaid and Medicare, among other
major direct spending programs, as well as the Pension Benefit Guaranty
Corporation and various other federal "insurance" agencies, and a
comprehensive regulatory framework governing securities, pensions, banking,
and insurance. It seems to me that these programs, however well or poorly
conceived, take the pressure off social security to perform all sorts income
support functions, particularly those that are short-term in nature.
Second, as to modern financial markets and sophisticated money managers being
able to construct a neutral system for centralized investment of the trust
funds, I say nonsense. For one thing, I'm aware of no index fund or funds in
which the government could invest (up to $1 trillion, under one leading
proposal) that would ensure funds were channeled into capital markets in a
manner that would leave the allocation of capital and the distribution of
wealth and income in society undisturbed. Would the index be international?
Would it include shares of stocks listed only on major exchanges? Which
countries would be included or excluded? Either way, the index would exclude
companies that do not issue stock (meaning millions of small companies and
start-up companies) as well as other assets, such as bonds and real estate.
Further, conceiving of the best business plan possible is a far cry getting
Congress to adopt it and then to live with it on a sustained, long-term
basis. After all, a "good" business plan would embody no deliberate
redistribution.
Carolyn Weaver