MARGARET WARNER: And joining me now are two economists who have authored influential, though somewhat different, approaches to investing some Social Security funds in the stock market: Henry Aaron of the Brookings Institution, and Martin Feldstein of Harvard University. Welcome, gentlemen.
MARGARET WARNER: Henry Aaron, lay out for us a little more fully the President's approach, as you understand it, how he would take some money and what percentage of the money would go into the stock market.
HENRY AARON, Brookings Institution: What the President is proposing is to give to Social Security beneficiaries the advantages of investing in a diversified portfolio of assets that includes investments in the private sector -- much the same as every private pension plan and most public pension plans do already. The reason is that the return would be higher than investing exclusively in government bonds. The framework, as described by Deputy Secretary Summers, is modeled on the governance structure of the Federal Reserve System and of the Thrift Savings Plan, which is the pension plan for federal employees that permits them to invest in private sector equities as well. Both of those frameworks, the structure of the Federal Reserve, the structure of the Thrift Savings Plan, have worked effectively for a long period of time to protect, in the case of the Fed, the governance of monetary policy; in the case of the Thrift Savings Plan, investments in equities on behalf of government employees from any tinge of political interference and it would work, I believe also for Social Security.
MARGARET WARNER: But under the President's plan, the government would essentially own these stocks, though.
HENRY AARON: The government would own them; they would be managed by an independent investment board appointed for lengthy, staggered terms, not removable for political reasons and that board would hire private funds managers, not government managers, to invest. It would be, in effect, like hiring Fidelity or T. Rowe Price to manage a piece of the reserves of the Social Security System.
MARGARET WARNER: Now, Professor Feldstein, you take a different approach.
MARTIN FELDSTEIN, Harvard University: I do. I think that having the government be the owner of a large amount of stock is a dangerous precedent.
MARGARET WARNER: I'm sorry, Professor Feldstein, I can't hear you and I want to make sure our viewers can.
MARTIN FELDSTEIN: Let's try again, can you hear me now?
MARGARET WARNER: Yes, I can. Thank you.
MARTIN FELDSTEIN: Very good. Well, I'm very concerned at the idea of the government owning so much stock. I think that while Henry Aaron describes a system that in theory would work, when it came to practice over time there would be too many temptations for government interference in the economy, meddling with the kinds of investments that can be made and the kinds of investments that can't be made. And I think there is an alternative that achieves the same high rate of return for individuals without the risks involved in political meddling by the government, and that is to use individual accounts of the sort that we are accustomed to with IRA's and 401(k) plans, but backed up by a government guarantee so that the total value of Social Security benefits remains safe.
MARGARET WARNER: And so how would your idea work? And I know that you've talked and written a lot about this and that the Republicans in Congress are taking a look at your ideas. Lay them out just a little more.
MARTIN FELDSTEIN: Okay. Well basically there'd be three pieces. There would be a continuation of the current traditional Social Security system financed by taxes as it is today, but instead of those taxes having to rise to about 18 percent in the future, they would be limited to the current 12.5 percent. So that's the first piece -- traditional Social Security financed by the tax system. The second would be individual accounts and the government would put into each individual's account an amount equal to a little more than 2 percent of the individual's wages and salaries up to the Social Security limit. And then the individual could pick a fund manager for those investments.
MARGARET WARNER: And just so I understand, so it would be just a portion of this individual's Social Security?
MARTIN FELDSTEIN: That's right.
MARGARET WARNER: The assets?
MARTIN FELDSTEIN: That's right. In the beginning, it would be relatively small and in the long run it would be about one-third would come in the form individual accounts and two-thirds would come from traditional tax- financed Social Security. But, and here's the key point, the third point is that there would be a government guarantee that would say that the combination of the traditional tax finance piece plus what you get as an annuity from your individual account must be equal to the benefits guaranteed by Social Security or more. So if you do well in the market, you are the -- you come out ahead, and if the market is underperforming expectations, then the government will make up that difference.
MARGARET WARNER: All right. Let me go back, first, now to the President's plan and just this question of political influence. And, Mr. Aaron, Alan Greenspan has said he doesn't think it's possible to completely insulate from political influence; that there will be pressure to invest in politically correct companies or affect company policies, and you heard what Mr. Feldstein says. How can you guarantee that if the government owns that much stock in the market, that that temptation won't be there?
HENRY AARON: Well, today it's my understanding Chairman Greenspan indicated that a bill submitted by two Democratic and one Republican member of the House to implement the President's proposal did contain the kinds of safeguards that he thought were necessary in order to forestall that kind of political interference. I would have to say, though, whenever the Congress acts, of course there's a dangerous of abuse of power somewhere down the road. When they created the Federal Reserve, there was a danger they might interfere with monetary policy. When they vote money for national defense, there's a danger that those funds will be misused. There's even a danger that the funds that people have in their retirement accounts could be controlled by Congress because of manipulation of tax laws. But we put in place safeguards to forestall those kinds of events. It's easy to wave ones arms and say, "Oh, something might happen." But we have a proven track record here. The Federal Reserve has run monetary policy for decades without political interference. The Thrift Savings Plan has invested in private securities without political interference. We know it works.
MARGARET WARNER: All right. Mr. Feldstein, what about - yes, please -
MARTIN FELDSTEIN: Can I just comment on that specific point? I think the Federal Reserve is doing a first-rate job now. I think it's done a first-rate job for quite a number of years. But if we look back, you can remember that it hasn't always been so good and the Federal Reserve was pressured into policies, which caused us to have very high inflation rates back there in the 1970's. So I wouldn't look to the Federal Reserve even as a model of complete absence of political pressure. But the temptation to interfere in individual companies, to have rules, which say that the funds cannot be invested in companies that do this policy or that policy, that invest abroad, that engage in certain kinds of activities, I think they would be very strong temptations for Congress to move in that direction, as many state pension funds have done. They've become quite active dealing down to the level of putting pressure on particular companies' managements because of their very large positions. And while I understand you could write legislation today, who knows what Congress will do when they're sitting there looking at a trillion or two trillion dollars of corporate stock and the power that that puts in the government's hands.
HENRY AARON: I think they would do the same thing that they do when they look at the funds invested on behalf of the Federal Reserve system employees or those of the Federal government. They would say, "We have many instruments for influencing private sector activities. We have tax policy, we can enact mandates. We have regulations, we have direct expenditures. We have tariffs." All of these instruments are ones that we can use, and the idea that they would then try to breach a series of walls that they have erected and that, in fact, could be defended by special voting rules in Congress to make amount amendment difficult, is I think very farfetched. There are protections and they have worked. The story about the Fed in the 1970's I think is not on point. The only time that the Fed has been -- has lent itself to political objectives really was during the period of World War II and its immediate aftermath. And the chairman of the Federal Reserve put a stop to that. Since then, the Federal Reserve may have made mistakes, but they have been fully independent members of Congress who have tried to interfere have been slapped down, as Congressman Matsui said in the clip on your show. It works.
MARTIN FELDSTEIN: I think it's an unnecessary risk to take because I think we can get the same advantages, indeed on a larger scale in terms of equity investing, if we leave it to individuals in the kind of 401(k), IRA accounts that we already have -- but build that into the Social Security system, have the government finance the deposits in those accounts and provide a guarantee.
HENRY AARON: There's a serious problem, though, with Professor Feldstein's proposal. The President actually has embraced the idea of setting up individual accounts separate from Social Security. The individuals who receive funds under this arrangement would retain all of the proceeds that accrue in their accounts. Under Professor Feldstein's proposal, at least the last version of it that I saw, they would have to surrender 75 cents of every dollar they earned on their individual account --
MARTIN FELDSTEIN: That's not the way -
HENRY AARON: For a dollar of Social Security benefits.
MARTIN FELDSTEIN: That's not the way I described it tonight. The way it would work would not involve that kind of surrender. Individuals would keep the full value of their -
HENRY AARON: Would they keep all of their Social Security as well?
MARTIN FELDSTEIN: They would keep the amount of Social Security that we can responsibly finance.
HENRY AARON: In other words, no.
MARTIN FELDSTEIN: And the combination would be guaranteed to provide the level of benefits that are called for in current law.
HENRY AARON: Marty, I asked a simple question.
MARGARET WARNER: Gentlemen, and I'm sorry, we don't have time to go fully into your plan, Professor Feldstein. But when and if the Republicans propose it, we'll definitely have you back to talk about it. But thank you both very much.