RE: Welcome to the Roundtable on Options for Reform

["Steven H. Johnson" <info@sscommonsense.org>]

My question for the panelists is simple:  Isn't there an 
alternative to positioning the savings option as an either-or
choice?  Wouldn't Social Security be stronger if we accumulated
savings both in personal retirement accounts and in the Trust 
Fund?

It seems to me that both of the one-track options for savings
have important weaknesses.

Accumulating a pool of capital only in the Trust Fund brings with
it a significant level of ownership concentration risk.
If the Trust Fund is to have enough capital that its earnings
are sufficient to cover the gap between the monies collected from
the 12.4% payroll tax, and the monies paid out to beneficiaries, 
estimated to reach 19.9% of taxable payroll by 2075, a little
itty bitty dinky Trust Fund won't do the trick.  The Social
Security Trust Fund will have to grow to a size equal to about 
half of GDP, and maintain that size, relative to GDP, in perpetuity.
Imagine a Trust Fund worth 50% of GDP.  [By contrast, today's
Trust Fund is projected to peak at about 16% of GDP, then shrink
rapidly.]  And - if the Trust Fund is to have a decent rate of
return - a third to a half of its portfolio should be in stocks.
A Trust Fund worth 50% of GDP, with half its portfolio in stocks,
ends up owning somewhere around a quarter of all stock on the 
stock market.  I imagine Mr. Shea is probably in favor of the Social
Security Reserve Board proposed by Mssrs. Aaron and Reischauer,
or something similar, but can anyone imagine the American people
accepting the notion of the Trust Fund owning a quarter of the
entire stock market, even if the assets were managed by a Fed-like
Board of financial eminences?

The one-track approach of saving everything in the Trust Fund, 
saving nothing in personal accounts, seems to me to be a high-risk
option, one that won't get off the ground, and one that won't do
anything practical to protect benefit levels for tomorrow's retirees.

But what's the alternative?  Saving funds only in personal 
retirement accounts?  Neither Mr. Beard nor Ms. Combs dealt in 
any meaningful way with the quite legitimate objections to personal
retirement accounts that have been raised in serious and 
thoughtful ways.  

Longevity risk:  Do you take your money out quickly,
and run the risk of outliving your money? Or take it out slowly,
and run the risk of dying before you've gotten your money's worth?
Or buy an annuity, and take a serious hit in your monthly payments
because the firm selling the annuity has to cover its risk?

Market Risk:  As a recent Brookings study demonstrates, market risk
can affect one's retirement annuity dramatically.  Retire when
the market is at its highest peak, and you'll make three times the 
retirement income of someone who's followed exactly the same 
savings pattern but who happens to retire when the market is in
its deepest trough.

High Fees:  Imagine the complexity of a hundred different Fund
Managers trying to keep track of 150,000,000 separate accounts.
Imagine the complexity of employers trying to remit funds from
their employees to dozens or hundreds of fund managers, and
trying to do so on a monthly basis.  The fee structure would
be horrific.

It seems to me there's only one likely outcome of a debate that's
couched in either-or terms, as all your position papers seem to
do.  

We won't accumulate savings according to the Democrats' 
preferred strategy, because the Republicans will arouse enough
public fear of Trust Fund stock ownership to kill the Democrats'
strategy.

Nor will we accumulate savings in personal accounts in any 
significant way, because the Democrats will arouse enough public
fear of the real risks associated with PRA's to kill the 
Republican strategy.

So we'll wind up cutting benefits substantially, because we're 
not creative enough to get beyond our fears.

Personally, I'd like to see substantial amounts of capital 
accumulated both in the Trust Fund and in personal accounts.
I think the risks associated with a Trust Fund savings strategy
can be mitigated if the Trust Fund is accompanied by a strong
personal account savings strategy.
And I think the risks associated with a PRA savings strategy can
be mitigated if PRA's are also accompanied by a strong Trust Fund.

The way to mitigate PRA fears is by stipulating that PRA's only
have to help finance the first 10 years of a person's retirement.
Under a "Each PRA dollar you receive cuts your Social SEcurity
benefit by ninety cents" approach, market risk is eliminated.  The
ten year formula essentially eliminates longevity risk.  And I'll
come back to the management fee issue in a second.

The way to mitigate Trust Fund ownership concentration risk is to
farm out all the Trust Fund assets to the hundred or so Fund
Management firms that have been selected by America's employees
to manage their PRA's.  Require the Trust Fund assets to be invested 
solely in very broad index funds.  Empower all those separate,
independent Fund Managers to vote Trust Fund stocks as they see
fit.  Allocate Trust Fund assets to them in proportion to their
popularity with the American people.  If 2% of all employees
choose Merrill Lynch for their PRA's, put 2% of the Trust Fund's
assets in Merrill Lynch's hands.  Such an approach would totally
decentralize the management and control of Trust Fund assets. 
And it would insulate them from political interference by Congress.
What Congress would dare tamper with the assets that have been
placed with Fund Managers that the American people themselves
have selected?

And this brings us back to the management fee issue.  If Social
Security's Trust Fund is sending its assets to dozens of Fund
Managers, it's a simple matter to include individual deposits,
and computer runs filled with all the needed data, right along
with the monthly Social Security investment check.  By allowing
PRA's to piggyback on top of Trust Fund deposits, tremendous
economies of scale are automatically achieved, thus defusing
the "high management fee" objection that's commonly raised by
liberal critics of PRA's.

The economic logic is clear.
If we want a low-risk strategy for saving money in the Trust Fund,
we also need strong PRA's.
If we want a low risk strategy for saving money in PRA's, we also
need a strong Trust Fund.

The political logic is more painful. 
REpublicans will have to admit that there's something to be said
for accumulating savings in the Trust Fund, if we do it right.
Democrats will have to admit there's something to be said for
accumulating savings in PRA's, if we do it right.
But if Republicans and Democrats could agree to put America's
retirees first, and to reconcile their differences with a both-and
approach, we won't have to cut retiree benefits simply because
the two parties can't agree on the best way to save.

How to finance a both-and approach?
Pay for PRA's out of the existing payroll tax.
Allocate 1.5% to 2.0% of the total 12.4% to setting up PRA's.
Pay for the growth in the Trust Fund with budget surpluses.
Clinton's $2.4 Trillion contribution would do most of what's needed.
Once the Trust Fund reaches its target size - say 25% of GDP -
no further subsidies would be needed.
Add a couple of standard tweaks to the mix.
Increase the earned income cap.
Bring in state and local new hires.
And the "carve out" fears concerning PRA's don't materialize.
Benefits don't have to be cut dramatically, to fund transition
costs.
Permanent solvency is achieved, not just actuarial balance.
The Trust Fund/PRA combo is just as strong, as a percent of GDP,
in 2075 as it is in 2050.  Roughly 45% to 50% of GDP.

BAck to my question:

If we continue to debate this issue in either-or terms, aren't
we doomed to fail?  Won't we wind up cutting benefits rather
deeply, simply because we'll never get agreement on whose
poison to drink?

Won't we have a much better chance of protecting strong benefit levels
in the future if we get everybody talking together in a 
problem-solving spirit about how best to accumulate capital
BOTH in the Trust Fund AND in PRA's?

Sincerely,
Steven H. Johnson

A more thorough analysis of these issues is available at the
Common Sense on Social Security website,
http://www.sscommonsense.org