The Issue of Size

["Steven H. Johnson" <info@sscommonsense.org>]

The Issue of Size:  It's Like Gravity, It Can't Be Repealed

One of the key issues in this discussion is the issue of size.

If we are to transform Social Security from an unfunded retirement
system to a partially funded system, or even a fully funded system,
we need to face up to the size of the funds we're proposing.  Or
if we want to replace Social Security partially or completely 
with PRA's, we need to face up to the size of the capital
pools we're advocating.

Let's put some real world numbers to the issue.

Social Security's total intake runs a little higher than 4.5% of
GDP, and, if the payroll tax remains where it is, Social Security's
tax intake will stay roughly where it is, at 4.5% of GDP.  

Social Security's obligations to beneficiaries are, today, a 
little below 4.5% of GDP.  On the other hand, as the "Over 64" 
portion of the population nearly doubles in size in the next 
four decades, the program's obligations to beneficiaries will 
approach 7% of GDP.

In other words, the looming gap that everyone's concerned about
amounts to roughly 2.5% of GDP.  

What to do about the gap?  Cut benefits?  Not popular.  Raise 
the payroll tax?  No way.  What's left?

The smartest thing to do is to accumulate a sizable pool
of capital, so that the earnings on capital are sufficient to close
the gap.

But what is the size of the pool that's needed?  Any pool of capital 
big enough to throw off earnings worth 2.5% of GDP has to be pretty 
darn big.  And it will be big regardless of whether it's held by the 
Trust Fund or held by PRA's.  Simply to close the gap between
4.5% and 7% of GDP, the pool of capital has to be worth roughly
65% of GDP. 

When we look at the size of the pool of capital that's involved,
we also should look at the average size of the U.S. stock market.
Historically, it has averaged roughly 65% of GDP.  While it's 
gone astronomically higher in the past three years, a sense of
realism suggests that current market capitalization levels,
relative to GDP, are probably not sustainable.  Over the long run,
it doesn't make sense to forecast a Market Capitalization-to-GDP
Ratio much above 100%.

Let's do the math.  Hmm, a pool of capital worth 65% of GDP?  
Equally divided between stocks and bonds?  Implies a pool of 
stocks worth about 32% of GDP.  At the same time, a total stock 
market value at about 100% of GDP?  So - the pool of capital 
contains about a third of the nation's stocks.  

And we're only talking about a pool of capital that's meant to 
"fund the gap."  Imagine the size pool we'd be talking about if
we were looking for enough capital to fund the entire program.

A sober look at Size ought to compel all parties to agree on one 
shared conclusion.  Fully funding the whole program, either through
the Trust Fund, or through PRA's, is simply beyond our reach.

Given the enormous size of the boomer cohort that's soon to reach 
its retirement years, launching a capital accumulation drive that 
successfully "funds the gap" between 4.5% and 7% will be one 
heck of an achievement.  Success will mean we've sized the problem 
properly.  Success will prove that we've sized the solution properly.  
And success will also demonstrate that we've been smart enough to accept 
the constraints of size.

-Steve Johnson.