Complexity, Some Questions on the Topic, and Charles Ponzi

[National Dialogue Moderator <moderator>]

	Complexity, Some Questions on the Topic, and Charles Ponzi

Complexity:	Simplicity is great.  I'm all for it too.  But it is not essential.  A social insurance plan for retirement income can be complex and yet perfectly servicable.  My car is very complex.  When I was a teenager, I could take apart my car and put it back togther with little difficulty.  I wouldn't even give a minuits thought to trying to do that today.  Would I trade my complex 1995 car for that simple one I had in the late 1950?  No way.  The same can be said of my computer, my health care, and so on.  

	Participants do not have to know all the intricacies of the program anymore than I need to understand how the electronic ignition in my car works.  I want to know that when I turn the key the car will start and that it will run for 15 to 25 miles on a gallon of gas.  Participants in Social Security need to know how large their benefits will be relative to their earnings and how that might change depending on when they chose to retire and how much they earn between today and their retirment..

	Social Security is complex because policymakers have used the program to persue many different objectives.  We can argue whether or not these objectives were appropriate.  Historically, the program has done a poor job informing people about their likely benefits.  That is changing but there is still a very long way to go.

	Approaches that rely on personal accounts are not inherently simpler.  They can't provide the answer to the most basic question participants need to know - namely, when I retire, how large will my benefits be relative to my pre-retiremenmt income? There are questions about administrative fees, transfer fees, annuitization options and costs.  The government would undoubtedly layer on considerable rules and regualtions that would make for complexity.  Furthermore, most such plans are butressed by a defined benefit program of some sort that would have all of the complexities of Social Security because it would be charged with achieving multiple objectives.

Questions on the Topic:	Getting back to the topic of this dialogue, I would love to hear what the participants in this discussion feel about the amount of latitude that participants should be given over their personal retirement accounts.

1.  Should there be any restrictions on permissablke investments?  Should only index funds be allowed?  Only approved mutual funds, actively managed or index? Individual stocks and bonds?  Real estate? Collectibles? My brother-in-laws dry cleaning store?

2.  Who should manage the accounts/investments?  One or a few private sector fund managers chosen by the government as is the case for the Thrift Saving Plan for federal employees?  Any of a large number of goverenment-approved fund managers?  Any registered financial institution regulated federal or state authorties?  The individual participant?

3.  Should there be restrictions on the fees charged by managers? Some plans like the Archer/Shaw and Feldstein proposals set maximum fees, others don't.

4.  Should there be restrictions on the disposition of the account balances upon retirement?  Some plans require annutization of the full balance, others require participants to purchase annuities sufficient to keep them above the eligibility level for welfare.  Other plans allow participants to withdraw their balances over a fixed period of time or even as a lump. 

5.  What should happen to the personal account balances when a couple gets divorced.  Should they be considered the sole property of the individual? Should they be split evenly between the the two?  Should they be subject to the settlement along with other assets and property?

	Answers to these questions will affect the level (adequacy), distribution, and political sustainability of any system of personal retirement accounts.

Charles Ponzi: I wish I had a dollar for every time someone has called Social Security a Ponzi scheme over the past two years.  It's a great line, but its an inaccurate one.  A Ponzi scheme shares one characteristic with an unfunded Social Security system but is different in two other important respects.  Both Ponzi schemes and Sociual Security collect from current investors (workers) money that is then used to pay current dividends (benefits).  They are both pay-as-you-go schemes with no invested base.  However, a Ponzi scheme promises returns that are unsustainable given the growth of the underlying customer base (the economy for Social Security), and Social Security has not.  That does not mean that the burdens of supporting its benefits wouldn't rise, just that under the current structure the will remain under 8 percent of GDP for the next 75 years.  Furthermore - and here is the big difference - participation in a Ponzi scheme is voluntary and participation in Social Security is not.  When investors begin to have a concern about the ability of a Ponzi scheme to pay dividends, they flee or don't join in the first place and the scheme collapses.  Like it or not, that can't happen in Social Security; in fact, the government can compel participants to increase their *investments* by increasing the payroll tax rate or base.

Robert D. Reischauer
The Brookings Institution