RE: Questions for Sam Beard

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

Thanks for your response to my questions.  I thought two of your
responses were on the mark, one was a little off, and one was way 
off.  

"Longevity.  Upon retirement, workers could access their money in
one of two ways.  One option, common in many pension systems, is
to annuitize the account and live off of an indexed percentage of
the principal.  The annuity lasts the lifetime of the retiree or
surviving spouse.  Another option, which may be attractive to
retirees hoping to pass a nest egg on to their children, is to
live off of the income of the account and pass the principal on
to their heirs."

I think this was a little off.  The company selling the annuity
has to set a low annuity level, do they not, to make sure that they don't
lose money on the sale of annuities.

How 'bout another tack on the same issue? If we had a 1.5% or 2%
carve out for PRA's, the money accumulated isn't going to be
nearly enough to fund a person's whole retirement in any case.
Therefore, why not say that the point of the PRA is simply to
fund the first ten years of a person's retirement?  I've priced
this option out with my insurance agent.  A ten-year annuity
is at least forty percent higher, per month, than a lifetime
annuity for someone who's on the verge of retirement.  Then we
can plug in a Feldstein-like approach for the first ten years.
"For every dollar you get from your PRA-financed annuity, your
Social Security benefit is reduced by ninety cents."  From the 11th
year onward, Social Security then pays you your full benefit check.

The logic here is simple.  In the first few years of retirement,
almost everyone is still alive.  So an INVESTMENT-based financing
strategy makes sense.  Later on, when some are alive and some
have died, an INSURANCE-based financing strategy makes the most
sense.  Use PRA's to help finance the first ten years.  Use
social insurance to finance the later years.  This, I think, 
would do a better job of meeting the "Longevity Risk" concern
raised by Aaron and Reischauer than would the scenario you've 
laid out.


"Market Risk.  ES 2000 supports limiting individual choice to the
picking of a government-approved professional investment
manager.  This can neutralize the more conservative investment
patterns of lower-income workers and minimize unsavvy investor
risks.  Investor education must be a cornerstone of American
public policy, particularly related to individual accounts and
Social Security.  Education is the key to creating a nation of
solid investors."

On this one, I think you've completely missed the point.  My
question assumes responsible investors and responsible fund
managers, with all money invested in fiduciarily-responsible 
(is fiduciarily a real word?) index funds.

My question went to a different point entirely.  The market goes
up, the market goes down.  If you were born into a cohort which
is lucky enough to retire at the peak of the market's highest up,
you'll do three times better than an equally responsible investor
who was unlucky enough to be born into a cohort that retired
at the market's lowest low.

The Feldstein-like approach suggested above, though, is a way
of fixing that.  "For every dollar received from your PRA
annuity, your Social Security benefit is reduced by ninety cents."
Those who retire at a peak get bigger annuities, but smaller
benefits.  Those who retire in a low get smaller annuities, but
bigger benefits from SS.  

There is an important caveat, however.  If Social Security
has only a tiny Trust Fund, there may not be enough money to 
finance a Feldstein like approach if the market goes into a 
prolonged downturn.  

[Interruption for a highly esoteric caveat.  Downturns aren't
all bad.  The lower the Market Capitalization-to-GDP ratio, the
higher the dividend yield rate, and the higher the real rate of
return available to those who invest once the market has turned
down.  Now, back to the argument at hand.]  

I think the safest
way to protect PRA owners against market risk when they retire
is to see to it that we also have a strong Trust Fund, so that
those cohorts unlucky enough to retire just after the market
goes south will have the backing of a Social Security system 
with a significant pool of capital of its own.

"Administrative Cost.  The most credible source, a study by
President Clinton's 1995-1996 Social Security Advisory Council,
showed annual fees ranging from .05% to 1% of annual assets under
management.  This range related to how much control individuals
have over their accounts.  Where individuals have no choice
beyond picking a government-approved investment manager, annual
fees run as low as 1/20th of 1%.  The middle option, where
individuals pick from portfolio options, annual fees run 1/10th
of 1%.  Options providing the most choice allow individuals to
choose stocks and bonds.  Annual fees run up to 1% of assets
under management."

I generally agree with you on this.

"Employer Headaches.  By using the existing Social Security
system, payroll taxes could be collected as they are now.  Once
collected, the funds can be diverted to personal retirement
accounts and funneled through the existing structure.  Efficient
models already exist:  employer 401(k) plans, govenment pension
programs and the Federal Thrift Savings Plan."

I generally agree with you here as well, but I would add a
vital tweak, based on my support for a dual track PRA/Trust 
Fund capital accumulation strategy.

Surely he best way to reduce employer headaches is to have a
two-track investment program.  Save money in the Trust Fund as
well as in PRA's.  Farm out the Trust Fund's assets to the same
Fund Managers that are handling PRA's, and give those Fund
Managers full voting authority over Trust Fund-owned stocks.
By dispersing Trust Fund assets among a hundred or more PRA
Fund Managers, all issues concerning a concentration of stock
ownership in the Trust Fund are effectively dispelled.  And,
on top of that, all deposits into employee PRA's effectively 
piggyback on top of Social Security's monthly deposit checks
written to the fund managers.

To sum up:

Longevity risk.  Easier to fix with a ten-year annuity scenario
than with a lifetime annuity scenario.

Market risk.  Easier to fix if the Trust Fund also has its own
pool of capital, to back up a Feldstein-like formula.

High fees.  Federal gov't bargaining power with PRA fund
managers ought be to be able to keep fees down, especially if
PRA owners are encouraged to put their money into index funds.

Employer headaches. Easier to avoid if we have a two track, PRA
plus Trust Fund capital accumulation strategy than if we just have
a PRA capital accumulation strategy.

-Steve Johnson