SOCIAL SECURITY

February 2005
		President Bush's call for reforms to Social Security is part of a broader philosophical effort to promote an "ownership society" in the United States. Dinesh D'Souza of the Hoover Institution at Stanford University and professor Jacob Hacker of Yale University answer your questions about the philosophical differences in the Social Security debate. Special Report: Social Security Reform

Forum Introduction After we baby boomers die off will the imbalance of workers to retirees correct itself? Why not just pay out less to those who have high assets? Why not just have the SSA invest a percentage of the current contributions in index funds? What happened to the "lockbox" idea? Has the Social Security trust fund been used for other purposes?	Michael Gover of Yosemite, Calif. asks: Sirs, why aren't we taking about (the Social Security Administration) just investing a percentage of the current contributions in low cost stock and bond index funds? According to the president's own statements this is the best way to increase returns. Dinesh D'Souza responds: If the government actually saved the money that you contribute in Social Security taxes, then yes it would have your money to invest in the market. But the government is spending your money, as it comes in, to pay retirement benefits to today's retirees. So the only money left over is the Social Security surplus: the difference between incoming Social Security revenues and outgoing Social Security benefits. Yes, the government can invest some of this in the market and the returns over time would probably be better than what the government gets now. But the government would also become a direct investor in the private market and would no doubt be accused of manipulating the market. Also the government would be taking financial risk on behalf of all the citizens. Bush's plan is better in my view because it allows you to invest a part of your retirement money in the market. Your risk, your reward. Those who are more risk-averse, whether by temperament or because they are closer to retirement, could choose safer investments like bonds or CDs. Jacob Hacker responds: You are absolutely correct that Social Security would likely achieve higher returns if it invested directly in index funds. The reason is simple: Social Security would enjoy much lower administrative costs than a system of 150 million individual accounts. A second advantage is that Social Security as whole could better manage stock-market risk (not eliminate it; that is impossible). For example, it could hold on to stocks and draw on other revenues when the market is low, rather than cashing in poorly valued stocks, as individual account holders would have to do when they reached retirement. In the late 1990s, the Clinton administration floated the idea of having Social Security invest passively in index funds through a separate Federal Reserve-like structure But the idea faced severe opposition, particularly from Republicans who worry that the process will become politicized. It is worth noting, however, that the private accounts proposal of President Bush might not be that different from direct investment by Social Security. For all the talk about how people will "control" their accounts, it is clear that account holders will be forced to invest in a very limited range of funds. If the restrictions are quite severe, the approach would actually be quite similar in practice to the idea of having Social Security invest the trust fund directly. However, it would inevitably entail higher administrative costs, and it would make it much harder to deal with the real possibility that some account holders will end up worse off due to stock market risk. Plus, it is not clear to me that such restrictions will be politically sustainable over time, and that raises the concern -- well illustrated by the experience of many Americans with 401(k)s -- that many Americans will experience poor returns or high administrative expenses.