DAILY SUMMARY May 25

[National Dialogue Moderator <moderator>]

		DAILY SUMMARY FOR MAY 25,1999


PANELISTS' COMMENTS

CAROLYN WEAVER answered the two questions, which she had posted
for discussion on the 20th. She had asked us to assess the downside
risks of a severe depression or a period of economic stagnation
like in the 1970s on both a private account scheme and Social
Security.  While she does not think that the probability of another
great depression is high she does think a replay of the 1970s is
not so unlikely.  She thinks that either event would wreak more
havoc on Social Security because it would quickly become insolvent
on a cash flow basis as it did during the 1970s.  In contrast,
private accounts would still be fully funded, although retirement
incomes for those close to retirement would be depressed. .  Ms.
Weaver next points out that safety net subsidies to older Americans
hurt in such a downturn could be modified to respond to such
conditions and she directs our attention to numerous other governmental
programs, which supplement the safety net. She views these programs
as taking "the pressure off social security to perform all sorts
[of] income support functions, particularly those that are short
–term in nature." She also points out the upside of an economic
downturn- that as markets rebound, those invested in private accounts
will be able to capture the rising asset values.

In answering her second question Ms. Weaver comes out strongly
against centralized governmental investment of surplus social
security funds.  She does not think that even the most sophisticated
money managers will be able to design a neutral system for centralized
investment.  She thinks that no index fund or funds in which the
government could invest would ensure that capital was channeled
into the market in a neutral manner. Moreover even if she could
conceive of a viable plan, she doubts that Congress could live with
such a system on a long-term basis.  She also notes that during a
sustained economic downturn, centralized investment, coupled with
our current demographics, would result in permanent losses in
retirement income for workers.

In a second post responding to "Cries in the Wilderness," Ms. Weaver
states that she is pessimistic about the prospects for legislative
reform. She places the blame for the present stalemate at President
Clinton's doorstep. After calling for a national dialogue on reform
in his 1998 State of the Union and convening a White House Conference
in December of that year she thinks he should have followed up by
introducing legislation rather than announcing a plan that was only
crafted to win a rhetorical battle in his most recent State of the
Union. She does commend certain members of Congress for courageously
confronting the issues of reform.  However, she does suggest that
the participants examine the statements that members made before
the 1999 State of the Union because she finds that, with some
notable exceptions, that since then many members' views have become
more opaque.

ROBERT REISCHAUER returns to the  unfunded liability issue in his
post. In discussing the cohort that retired between 1940 and 1965,
he states that the nation made a deliberate policy decision to
provide these early cohorts with benefits that were more adequate
than their payroll tax payments justified and that this welfare
function should have been supported through general revenues and
not through payroll taxes.  He points out that this decision saved
a lot of income tax dollars but it did divert a big chunk of payroll
tax contributions away from investment. And, this loss has been
passed from the shoulders of one cohort to the next.  To compensate
for this loss, a general fund contribution could be made to the
trust funds, which is what the President proposes. Mr. Reischauer
also observes that privatization proposals such as Archer/ Shaw
and the Feldstein plan require the transition costs of moving to
a privatized system to be paid for by general revenues.

Mr. Reischauer next asks what type of program should be established
for those workers just entering the work force at age 20 and provides
us with a detailed analysis of the upsides and downsides of a fully
funded defined benefit/ social insurance system with the outcomes
under privatization.  He notes that social insurance spreads risks
broadly across society whereas privatization concentrates both the
risk and the opportunity on the individual. Thus, while benefits
may not be proportional to contributions under a social insurance
scheme, such a system does provide special benefits to survivors,
stay- at-home spouses and to divorcees. He points out that even a
highly credentialed 20-year-old can realize that life is uncertain
and that technological change or the birth of a child with a
disability can abruptly alter one's lifetime earnings.

In looking at a mandatory system of private savings, Mr. Reischauer
points out that those who invest in Microsoft will do better than
those who invested in the Penn Central and that under such a system
there would not be additional benefits for the stay-at-home spouse,
divorcees might be limited to their own accounts and dependent
children would not receive benefits.  Mr.  Reischauer also observes
that those of modest means are much less tolerant of investment
risk that those who make more money. If history is a guide, he
argues that a privatized system will result in greater income
disparities among the retired than the disparities that exist in
the working population.  He also points out that those with account
balances insufficient to support an adequate retirement cannot
count on the present safety net to support them in any but a very
mean fashion.

In his post Mr. Reischauer also responded to the comments of several
participants. In particular, while he agreed with Michael Jones
that under a defined benefit system there is no guarantee that a
higher return on investments will yield higher benefit payments to
an individual, he postulated that higher returns could lead to
lower payroll taxes or higher benefits. He also noted that deliberate
overfunding of the system is not much of a risk in a representative
democracy.

PUBLIC COMMENTS

--Ken Steiner pointed out the differences that he sees between a
defined contribution approach and a defined benefit approach. He
thinks those arguing for the former must show that the investment
return net of administrative expenses must be greater than the
return under a defined benefit plan. He also points out that those
favoring the former see such a system yielding more individual
equity whereas supporters of the latter stress that their system
provides for both social adequacy and individual equity.

--Ruth Reilly agrees with Tom Spens that we cannot assume that the
market will provide adequate retirement incomes for all.  She views
many of those advocating privatization as ignorant of American
economic history and foolishly naïve in thinking that each is a
master of his destiny.  She does not think it wise to make social
policy in this area on the basis of more for the greedy. She also
raised the question of management fees in Chile running at 25%.

--Andy Lang responds that Ms. Reilly has somewhat overstated Chile's
management fees, but he goes on to critique the whole Chilean
experiment. He says the real figure for management fees is around
19% due to an inordinately high turnover rate that maximizes
commissions and investment fees. He notes with in the recent Chilean
stock market crash, the market lost 50% of its value and as a result
many who planned on retirement are unable to do so. He views the
Cato Institute as a Trojan Horse for the retail sector of the
financial services industry, which contributes heavily to the group.
He also suggests that we question the motives and background of
some participants in the Cato effort such as Jose Pinera, a former
Chilean Labor Minister under Pinochet, and Richard Mellon Scaife,
the right-wing anti-Clinton philanthropist. In a second post, Mr.
Lang argues that for a large pension system, the difference between
fixed and variable costs makes a defined benefits pension system
far superior to a defended contribution plan.

--Steve Johnson points out the advantages that insurance schemes
offer as opposed to investments in solving societal problems such
as auto and home insurance.  He thinks that the wholesale application
of an investment model to what is obviously an insurance problem
is not such a smart thing to do. He therefore favors a two-track
approach of accumulating "investment capital in private accounts
to cover the first ten years of retirement and [accumulating]
capital in the Social Security Trust Fund to cover the later years
of retirement.".

--Michael Jones demurs from Carolyn Weaver's critique of investing
surplus social security funds in index funds.

--Don Hutchison wants his contributions to Social Security to be
real investments and not part of a Ponzi scheme.


Barbara Brandon