Every dollar invested in a typical defined benefit pension plan, actuarially funded, of course, has a 'life expectancy' of around 15 years, before being paid out as a benefit---ample time to double your money in typically well-diversified portfolios with 50-60% in stocks.
It will also be a much more stable system, which, unlike the current system, is shielded substantially from the short-term vagaries of both economics and demographic changes---and isn't that what we all want?
The interest rate assumption used is key. It serves as the link between the size of the liabilities and the annual required contribution and the long-term investment strategy used by the plan sponsor (the federal government, in this case). If that strategy uses only low risk investments, like treasuries, the cost of the program will be immense (as it currently is, partly because of this and partly because it has too little assets). If it uses, and properly so, assets like stocks, this is immediately reflected in a higher assumed interest rate, which results in the kind of lower cost I just mentioned. Everything depends on how effective and well-thought out this strategy is, especially the asset allocation., and how well implemented, of course.
You and others always get nervous when the government gets into the act of investing in the private sector. So do I--more than you, perhaps. And more than the Privatizers even.
It might surprise you to know, however, that in most large defined benefit pension systems in the private sector, the plan sponsor rarely gets involved in the day to day decisions of the investments. Instead they concentrate on the long-term investment strategy, the selection of investment managers to carry out that strategy, and the monitoring of the results from those investment mangers. When you do this right and advance fund, the money is long-term and does not need constant attention.
I wan to even separate this process from Congress and government by having the system run by professionals on behalf of the people, subject of course to Congressional oversight.
And what of the problem of: who owns the assets?
This is a more difficult decision and one I have given considerable thought to. The answer, I think, also comes from experience I have had working with some very good pension lawyers, and some independent thinking and reading on the subject, along with over 40 years experience.
Many pension legal specialists feel that the issue of who owns the assets of defined benefit pensions---the plan sponsor or the participants---has never been satisfactorily resolved in the courts in the private sector.
While there are good arguments on both sides, at least in some cases they feel the weight of evidence is clearly on the side of the participants, not the employer. These cases typically involve collective union bargaining---when the union workers give up direct pay in exchange for an improvement to the plan, or even the establishment of the plan in the first place. Pension consulting actuaries typically price out the costs of the improvement in cents per hour, so that tradeoffs in pay and other benefits, all of which are priced in a similar fashion, can be made in the bargaining process.
It seems to me that one roadblock to setting up an advance funded Social Security program might be to make a decision that the assets belong to the plan participants, with appropriate restrictions to prevent unwarranted or too frequent interference in the process.
As I have sometimes said, if democracy is such a great thing for America and the nations of the world, why not introduce some more to corporations by letting individuals 'own' a greater share in those corporations?
Or conversely, it could be left to each mutual fund or asset manager that does the investing, with the people voting occasionally on the alternatives brought before them---similar to the way our government is a representative form of democracy and not a pure one.
Ownership need not necessarily convey also making investment decisions. When I buy a share of stock of a mutual fund, the voting is done by the mutual fund not by me. I choose the fund partly on what the fund says about the companies they invest in and what their philosophy is.
The federal government would have a say in what countries would be off limits---like countries on our terrorist list, like Iran and Libya, or companies controlled by the Red Army in China for example. Beneath that, you could have a process to allow an occasional list of votes by the people, to leave out companies or entire industries for example. Big Tobacco comes readily to mind.
Anyway, these are important issues to discuss thoroughly and to nail down going in.
OOOOOO
By the way, my definition of a Ponzi Scheme includes any system that include new entrants to maintain its financial viability---just like Webster's Ninth Collegiate Dictionary says. Social Security is a Ponzi Scheme in slow motion. So you should turn in all those fictional dollars you have been collecting.
OOOOOO
We know everything we need to know about how pension systems work or don't work as the case may be. We do not have to reinvent the wheel to identify the problems in Social Security and fix them. We do not have to adopt draconian solutions that bring in a host of new and terrible problems either.
To summarize, there is no other way to maintain decent benefits under Social Security or any pension scheme, for that matter, that does not pay for a substantial part of the benefits by using investment returns.
For a pension system to cover large numbers of diverse participants, as between an advance funded defined benefit pension system, with laws, and a defined contribution approach, there is virtually no comparison.
The former does it better in every way---and with no risk to participants.
To do it right, though, we must also separate the operation from the government.
And keeping it like it is is no option for the long run either. Unless you enjoy the sight of a divided Congress dickering and fighting and probably screwing it up worse, that is.
