Common Errors and Tough Tradeoffs
- Date: Thu, 22 Apr 1999 09:42:53 -0400 (EDT)
- From: "Steven H. Johnson" <info@sscommonsense.org>
- Subject: Common Errors and Tough Tradeoffs
Hello. I got drawn into researching this issue when I read
Sam Beard's book, Restoring Hope in America. His prescription
seemed completely unrealistic, and I wanted to learn more. I've
built my own spreadsheet model, in order to analyze different
reform proposals. My actuarial balance numbers track the
actuarial balance numbers quoted by the Social Security Trustees,
to the fourth significant digit, so I think my model works well.
In brief, in researching the issue, I've found the following.
-A pervasive assumption that the stock market will be as capable
of delivering 7% returns in the future as it was in the past.
The evidence doesn't support this assumption.
-A matching assumption that the entire Social Security program
could be financed through the stock market, if the nation chose
to do so. While this is hypothetically possible, if we could
tolerate having seventy to ninety percent of the stock market
owned by Personal Retirement Accounts, it's not realistic.
-A tendency to equate "actuarial balance" [a measurement tool
used by the Social Security actuaries] with genuine long-run
solvency. This is a very serious error. Liberals who are
hoping for a solution on the cheap are the ones most likely
to commit this error.
-An assumption that the current financing arrangement is
fundamentally phony, and that tomorrow's Social SEcurity
program is therefore phony as well. It's not phony, but it is
ill-advised. The commingling of pension funds and operating funds
isn't allowed in the private sector and is not a good idea in
the public sector either.
The result of these very widespread errors is that the tradeoff
discussion we need has not yet been joined properly.
1. Solvency. Do we want to achieve true and lasting solvency,
or merely do a patch job? (Shooting for actuarial balance,
as the 1983 Greenspan Commission did, ends us up with
a patch job.) The erroneous assumption that actuarial balance
equals lasting solvency has prevented us from discussing this
issue in realistic terms.
2. If we want true and lasting solvency, we have to face up to
the looming gap. Tomorrow's tax receipts won't be nearly
enough to cover tomorrow's benefit obligations. Do we as a
nation want to close the gap by cutting benefits? Or do we
want to close the gap by accumulating a substantial pool of
savings? Enough savings, that the earnings from savings are
sufficient to make up the difference between tax receipts
and benefit expenditures?
3. If we'd rather close the gap by accumulating savings, what's
the best way to accumulate savings? In Personal Retirement
Accounts? In the Social Security Trust Fund? Or in both?
Some say Personal Retirement Accounts. Those who do typically
have an unrealistic idea about the stock market's ability to
absorb a flood of Personal REtirement Accounts, as well as an
unrealistic expectation about the rate of return that they're
likely to earn in the future.
Some say Trust Fund. Let the Trust Fund invest in stocks, so
that it can earn a higher rate of return. Those who give this
answer haven't fully faced up to the fact that a Trust Fund
big enough to close the gap will end up being worth about fifty
percent of GDP, with half its assets in stocks. This would
give the Trust Fund ownership of about a quarter of the entire
stock market.
I think there is a workable win-win resolution to this issue.
But I'll save it for later.
Steven H. Johnson
Common Sense on Social Security