From: "Steven H. Johnson" <info@sscommonsense.org>
Subject: RE: General Comments
A few reactions to Mr. Marsden's thoughtful comments:
"Intergenerational Equity -- I consider this an abused topic. Yes, earlier generations are making out much better from Social Security than current generations can ever hope to do. However, in the bigger picture, younger people are far and away receiving the better end of the deal. Without even getting into non-governmental transfers of resources (mostly education), earlier generations have built the roads and other infrastructure that we take for granted, as well as maintaining a level of general peace throughout the world. That ANYONE should complain that these people are getting an extra helping from Social Security is, when everything is considered, absurd."
Agree entirely. Well said.
"Individual Accounts -- Actuarially, these are a very bad idea. As a matter of simple statistics, it is far cheaper to guarantee a level of income with pooled funds for a group than with individual accounts. We can know with a high degree of certainty what the distribution of time of death for a group of people will be, but for most individuals we have little idea when they are likely to die. Viewed another way, if our goal is to provide retirement income, then every dollar that gets paid out in the estate of an individual account holder who dies before exhausting his account is a dollar that is leaking out of the retirement system. It is far cheaper to fund a system that avoids such leaks."
The leak problem is real. It does reduce the efficiency of individual accounts as a savings vehicle. At the same time, the magnitude of the savings we require, if we are to fund the benefits needed for future generations without raising payroll taxes, is, by any normal measure, quite stupendous. Social Security would need a Trust Fund equal in size to about half the nation's GDP, and it would need to have roughly half that Trust Fund held in stocks.
Such a large holding implies Trust Fund ownership of fifteen to thirty percent of the entire stock market.
I think it's smarter to accumulate capital both in the Trust Fund and in private accounts. For one thing, that cuts down the total amount of stock ownership needed in the Trust Fund. For another, it makes it possible to farm out the management of the Trust Fund's assets to the dozens, or even hundreds, of investment management firms that would have been chosen to handle private accounts. That dramatically decentralizes control of the Trust Fund's assets.
And - as a third piece of the argument - if Congress aims toward a system that's based both on a strong Trust Fund and on private accounts, Congress will have a much easier time getting the permission it needs from the American people to build up the rather massive pool of savings that Social Security needs, if it's to sustain the level of protection it now makes available to retirees.
"Equity Investments -- We have been very spoiled over the last twenty years. A lot of the rise in stock prices is due to the decline in interest rates and the decline in the "risk aversion" of investors, which normally deflates the value of stocks. Interest rates and risk aversion cannot keep going down -- they are both generally limited at zero. It is probably more likely that the trend of the last twenty years for these two factors will be reversed than that it will be repeated. Stocks are no panacea."
It's wise to be cautious about stocks. The same factors that produced seven percent returns in the past seem poised to produce four percent returns in the future, as soon as the stock market's current S-curve runup reaches its crest and levels off. Moreover, the stock market is not infinite in size. Market capitalization, as a percent of GDP, averaged only 65% of GDP over the past several decades. A Social Security pool of capital big enough to fund the gap would have to be about 50% of GDP. Imagine the stock ownership implications if half that pool of capital were held in stocks.
"Strain on Charity -- Many advocates of privativation believe that there will be few enough people who fail to provide themselves with sufficient retirement income that charity will be able to accomodate their needs. Without going into the likely volatility of such need over time, just the notion of presuming to add such a significant weight to the charity of the country strikes me as ill-conceived. I do not think that charity can be taken for granted -- when the charity of individuals is stretched to far, the situations that once seemed to them unacceptable and worthy of charity will start to be accepted and not met with charity. As an anectdote, many people who see just one or two beggars in a day will give them some change (I won't comment on whether or not this is a wise thing to do). But when there is a beggar on every corner, the band-aid of a few coins will often seem not worth it, and many people will give nothing at all. Reliance on charity is nothing like a retirement policy."
