DAILY SUMMARY May 27-29

[National Dialogue Moderator <moderator>]

Title: Daily Summary

Daily Summary

May 27-29

Panelists' Comments:

• Robert Reischauer ("Complexity, Some Questions on the Topic, and Charles Ponzi") On "complexity," Reischauer stated that Social Security is complex because policymakers have used the program to pursue many different objectives. He said simplicity is great, but not essential. He compared Social Security's complexity to the greater complexity of cars over the last 40 years, suggesting that people don't need to know all the intricacies of how a system works. He also stated that a system of personal accounts would also include complexities on administrative fees, transfer fees, annuitization options, costs and government regulations.

On the recurring comments that Social Security is a Ponzi scheme, Reischauer said the comments are inaccurate. He said Social Security and Ponzi schemes are alike in the respect that they collect from current investors (workers) to pay current dividends (benefits). They are different, however, in two important ways: (1) Ponzi schemes promise returns that are unsustainable given the growth of the underlying customer base, and (2) participation in Ponzi schemes is voluntary, meaning that the schemes collapse when investors start to become concerned about its solvency.

Reischauer also asked 5 questions:

1. Should there be restrictions on permissible investments with personal retirement accounts?
2. Who should manage the personal retirement accounts?
3. Should the government restrict the fees charged by investment managers?
4. Should the government restrict the disposition of the account balances upon retirement?
5. What should happen to the account balances when a couple gets divorced?

• Carolyn Weaver ("Re: Complexity") disagreed with Reischauer's automobile comparison. She thinks Social Security should be more understandable, suggesting that it is more complex than 401(k) plans and life insurance policies. She said people should be able to tell with some reasonable certainty what they will receive from Social Security under various reasonable circumstances. She asked who can a person call to fix that problem and how long it will take to do so.
• Carolyn Weaver ("Can U.S. be as bold as.....Sweden?") notes Sweden's reform plan that involves workers investing 2.5% of the payroll tax in private, self-directed investment accounts. Workers select the funds of their choice. The system has "none of the 'necessary complications'" opponents of personal accounts say are necessary. Sweden has also made benefits strictly proportional to lifetime earnings and adjusting the benefits to reflect an interest factor similar to a defined contribution plan. She recommends a similar approach here.

Panelists' responses to moderator questions about Lock box Mechanisms and Impacts on the Federal Budget Deficit: The Moderator, Bob Carlitz, asked the panelists to address two final questions: (1) whether the "lock box mechanism" approved by the House of Representatives to protect the Social Security surpluses will work and whether it will undo the unified budget surplus rules; and (2) how to assess the impact on the overall federal budget deficit of using general fund revenues to support fixes to Social Security.

• Robert Reischauer said the motivation for the lock box legislation is commendable but that it will have little practical effect. He said it will help focus attention on the balance in the non-Social Security portion of the budget - which has been in a deficit despite the surplus that exists in the unified budget (which includes both non-Social Security and Social Security funds). Reischauer described the unified budget process, the growing surpluses in the Social Security accounts, and the role of the Social Security surpluses in creating a surplus in the unified budget accounts. He also described the Congressional concerns that the Social Security (and unified budget) surpluses will be spent and how that led to the "lock box" proposal.

He said the lock box proposal allows members to raise a point of order against any proposed legislation that would cause the non-Social Security accounts to go into deficit. The proposal's strength is mitigated by the ease of overriding the points of order.

On the second question, Reischauer said that using budget surpluses to fix Social Security is appropriate if: (1) the surpluses come from the non-Social Security portion of the budget, (2) the fix does not promise higher benefits for future Social Security beneficiaries than are promised under current law, (3) the use is for a temporary, transition period, and (4) the use does not impose excessive fiscal restraint on other national priorities, such as Medicare, defense, education, and food stamps.

• Carolyn Weaver stated that the lock box proposal can make it harder for Congress to spend the surpluses. She also said it can focus attention, much more clearly than now, on efforts to raid the surpluses. She proposed personal retirement accounts owned by workers as a more secure way to save the surpluses.

On the question of gamesmanship, she compared the lock box proposal - which protects all of the Social Security surpluses from being spent on other programs -- to President Clinton's proposal - which saves only 62% of the Social Security surpluses for Social Security and prepares to spend the balance on other activities.

On the second question, Weaver said that general revenues should be used for purposes of easing the transition to personal accounts. This use is fair to spread the burden of unfunded benefit promises of the past, but not for the long-term.

Responses to public comments:

• Reischauer ("Persyko questions") responded to questions asked by Persyko ("Questions Regarding Private Retirement Savings Inequities") about inequities between private and public retirement savings options:

On the question why workers without employer-provided pension plans are limited to a maximum annual $2,000 IRA contribution, Reischauer agrees that equity considerations would argue for increasing the limit, but suggests 4 reasons why lawmakers have not done so: (i) difficulty in enforcement by IRS, (ii) few people take advantage of the current limits, (iii) potentially high budget costs, (iv) potential erosion of employer-sponsored plans.

On the question why employees do not have input (proportionate to their assets) in investment decisions for employer-sponsored plans, Reischauer said the idea sounds reasonable, although businesses will object to the reduction in their flexibility.

On the question of how the investment strategies for personal accounts or trust fund investments would reflect the beliefs, personal values and societal concerns of individual investors, Reischauer said those individual preferences should not be reflected. He said collective investment decisions should not be affected by social concerns and that strong institutional protections should be established to protect them from political interference.

• Weaver ("Re: Hart on Unfunded Liabilities and General Revenues") responded to Hart's discussion about people not wanting to discuss general revenue financing. Weaver noted a "traditional concern" of Congressional Republicans and others about putting the Social Security program in a position of having a claim on general revenues. Weaver states that there is an enormously important distinction between temporary, transitional uses and more permanent uses of general revenues - but the distinction is difficult to communicate. She also noted that the unfunded liability of the Social Security program is an off-the-books or implicit debt of the federal government that dwarfs the public debt outstanding. The debt formation process can be broken by using personal accounts.
• Weaver ("Re: Hutchison 'C.Weaver: National Treasure', and '2% Solution'") also addressed the 2% solution reform - a 2% payroll tax increase for the next 75 years. She said the proposal would allow benefits to be paid on time for the next 75 years (closing the financing gap) but would leave the system broke in year 76 - and earlier if the actuaries' assumptions prove incorrect. It also depends upon the doubtful ability to save the early surpluses to cover later deficits. It merely props up the current system, changing nothing except to increase taxes.
• Weaver ("ssa models") responds to Ridgeway ("Where Do We Go >From Here") by noting that policymakers rely almost principally on the models developed by the Social Security Administration's Office of the Actuary to analyze competing reform proposals. She states that the work of the Social Security actuaries is generally regarded as high quality, but the models address a narrower range of options and issues than researchers and others would like explored. She notes that SSA has been unwilling to make its models generally available to the public for review. Such release and public review would benefit the process.
• Weaver ("Greenspan, Private Investment and Zero Sums") responded to a number of comments that referred to Fed Chairman Alan Greenspan's suggestion that private investment of social security would result in little more than an asset switch - more equities and fewer bonds for the trust funds, and vice-versa for the public - with no net gains. She said that Greenspan was referring to reform proposals that change the investment policies for the trust fund reserves. The effect is zero sum because there is no new saving or capital investment. She states that proposals for personal accounts involve paying off some or all of the unfunded liability, limiting the growth of new unfunded liabilities and investing a share of workers' taxes in private markets, increasing national saving. She states that Greenspan favors personal retirement accounts.

Public Comments

• Michael Jones ("Re: Complexity, Some Questions on the Topic, and Charles Ponzi") responded to Reischauer's question on restrictions on investments with personal accounts, stating that indexed mutual funds are preferable to investing in individual stocks, given their generally higher returns and lower costs. He said investments should be restricted to higher quality bonds and index funds.
• Walter Hart ("Re: Restrictions on Investments") stated that there should be some restrictions on investments with personal accounts. He said there should be minimum safety net funded by general federal taxes and private accounts funded by workers' payroll taxes. The higher the safety net, however, the greater the likelihood that workers might invest their funds in risky investments. He suggested that people might be required to invest a basic amount in less risky investments before being allowed to invest in higher risk investments.

Ashley Schannauer