Facts

[Ken Steiner <Ken_Steiner@watsonwyatt.com>]

Having read much of the dialogue on investing in stocks, I would like 
to add several facts to the discussion.

The basic equation for funding any retirement program is:

B = C + I - E,
 
Where B is the benefits that can be paid from the program, C is 
contributions to the program, I is the investment return on program
assets and E is program expenses.
 
Social Security can involve individual accounts with investment directed by
workers (a defined contribution approach), it can involve benefit
promises funded by a nonallocated trust fund arrangement (a defined benefit 
approach), or it can involve some combination of the two approaches.

If investment return less administrative expenses under a pure defined
contribution approach is the same as the investment return less administrative
expense under a pure defined benefit approach and contributions to the
two programs are the same, benefits in total will be the same.

Those who argue that the pure defined contribution approach will provide
greater benefits for the same contribution must argue that investment
return net of administrative expenses will be greater under the defined
contribution approach than it will be under the defined benefit 
approach.

Supporters of the defined contribution approach generally like this
approach since they believe that, in addition to greater benefits, there 
will be more individual equity.  Supporters of the defined benefit
approach argue that it provides a better balance of individual equity
and social adequacy. 
 
Since both approaches can be designed to invest accumulated assets
in roughly the same investment vehicles, the question becomes is it
better to have individual accounts with less social adequacy or a defined
benefit approach with more social adequacy but government investment
of trust fund assets. 














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