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Question for Ron Gebhardtsbauer


Dear R.G.

In your position paper, you stated the following:

"Individual Accounts put more risk on individuals and have 
implementation problems. Carve-outs could force more benefit 
cuts. Add-ons are like a tax increase, unless voluntary."

My question is this:  Isn't there a third option?

The typical argument on private accounts does tend to revolve
around the two options you've stated.  Either they're financed
out of the existing 12.4% payroll tax (the "carve out" option), 
or they're financed as an add-on to the existing payroll tax.

In the first instance, benefits may have to be cut in order to 
finance the transition to PRA's.  

In the second instance, the cost of funding PRA's becomes a 
permanent new cost, to be born either out of the payroll tax
(not a popular suggestion) or by a subsidy from the federal
budget (Martin Feldstein's suggestion, but not, I think, a 
popular one).

There's a third scenario that I like better.  

Accumulate capital both in PRA's and in the Trust Fund.  
If, together, the two pools of capital add up to about 50% 
of GDP, the earnings from capital can be sufficient to "Fund 
the Gap," i.e. adequate to make up almost all the difference 
between the money that will come into Social Security, from 
the payroll tax, and the money that will be spent by Social 
Security, making payments to beneficiaries.

If 1.5% of payroll, or 2% of payroll, is devoted to building up
PRA's, and if the proposed Clinton subsidy is used to build up
the size of the Trust Fund, and if the earned income cap is
raised to again take in 90% of all payroll (as it used to),
and if state and local government new-hires are added to the 
system, three desirable outcomes are achieved.

First - benefit cuts, if any can be quite modest.  At worst, about
a third of the Aaron-Reischauer benefit cut package would need
to be implemented.  My calculations indicate that the Aaron-
Reischauer package is the equivalent of a straight line 10.8%
benefit cut, across the board, from 2000 to 2075.  A third of 
their 10.8% average cut would only be about 3.5% across the board.

Second - a permanent increase in the payroll tax is avoided, and
a permanent subsidy from the federal budget is avoided.  Once
the Trust Fund has been grown to the requisite size (e.g. 25%
of GDP), no further subsidy is needed.  

Three - we have lasting solvency, not just the cosmetic nicety
of "actuarial balance," which merely postponse Social SEcurity's
bankruptcy to the year following the end of the planning
period.  Lasting solvency means that Social Security's twin
pools of capital, worth 25% of GDP in the Trust Fund, worth
another 25% of GDP in PRA's, continue to function at that level
throughout the last 25 or 30 years of the planning period.  The
system's financial health remains as strong in 2075 as it was
in 2050.

It's a third option, right?  It's not a carve out that cuts
benefits.  It's not a lasting add-on, that permanently raises
the payroll tax.

Is the dual track capital accumulation strategy one that you've 
looked at?  If not, how do the numbers work on your spreadsheet?
They work well on my spreadsheet, and the spreadsheet I've built
produces actuarial balance numbers that match Social Security's
to the fourth significant digit.

I look forward to your answer.

-Steve Johnson.


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