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« Back to Securing Social Security main page   Transcript for: Securing Social SecurityANNOUNCER: Funding for Think Tank is provided by the John M. Olin Foundation, the Lynde and Harry Bradley Foundation, and the Smith Richardson Foundation.(Musical break.) MR. WATTENBERG: Hello, I’m Ben Wattenberg, fewer births, longer life expectancies, aging baby boomers, it adds up to fewer workers supporting more retired people. What’s the best way to bolster Social Security? George W. Bush proposes diverting a portion of payroll taxes into private investment accounts yielding higher returns. Could such a plan change the social fabric of America for the better, allowing all Americans to share the fruits of corporate productivity, or could it break the bank? Think Tank is joined by: Alan Blinder, co-director of the Center for Economic Policy Studies at Princeton University and a visiting fellow at the Brookings Institution; Alicia Munnell, professor of management sciences at Boston College, and co-editor of Framing the Social Security Debate, Values, Politics, and Economics; and Lawrence Lindsey, the Arthur F. Burnes scholar in economics at the American Enterprise Institute, and chief economic advisor for the Bush Campaign. The topic before the house, securing Social Security, this week on Think Tank. (Musical break.) MR. WATTENBERG: Signed into law by President Franklin Delano Roosevelt in 1935, Social Security has always existed as a pay as you go system. Payroll taxes are collected from workers and then paid out as benefits to current Social Security recipients. Right now more revenue is being generated than what is needed to pay benefits, and so there is a surplus, a Social Security trust fund invested in U.S. Treasury securities, with a return of about 2 percent. But, an aging America coupled with low birth rates means that the number of workers for each retiree is dropping steadily, and by 2037 the trust fund will experience a short fall, leaving Social Security able to pay only about 70 percent of its promised benefits. Governor George W. Bush’s partial privatization plan could yield higher returns. And some supporters say it could also bring about people’s capitalism, giving all Americans the opportunity to accumulate wealth. But, opponent Vice President Al Gore points out that Social Security provides Americans with a base of income they can count on in retirement. And he says, investing those monies in stocks is too risky. Instead he’s called for a separate government subsidized retirement savings plan. Lady, gentlemen, thank you for joining us. Normally we have only distinguished and entirely objective scholars, or so they tell us. In this case, it is fair to tell our audience that Larry Lindsey is the chief economic advisor for Governor Bush in an unpaid capacity. Alan Blinder is former deputy chairman of the Federal Reserve Bank, and is an advisor to Vice President Gore. And Professor Munnell is an enthusiast in favor of Vice President Gore in this election. And I, of course, am above the fray, but in this particular instance I have written at some length, and basically support what Governor Bush is proposing. So that’s taken care of. But, we’ll still try to keep the spin down to a minimum, because we are such a distinguished company. Larry, what is it that Governor Bush is proposing? MR. LINDSEY: The basic problem we have to solve is that there’s a Social Security short fall out there. It’s about $8.8 trillion, according to this year’s Social Security Trustee’s Report. And it’s grown during the last decade, in 1992 it was only $7.4 trillion. So it’s a big problem and getting worse. There’s three ways of dealing with it. You can raise taxes, you can cut benefits, or you can try and get a higher return on the Social Security surplus that you mentioned. And the thrust of Governor Bush’s plan is to do just that, to give a portion of that surplus to workers, to allow them to have a personal retirement account, where they own the assets, and they can invest those assets in the private sector and get a higher return. MR. WATTENBERG: Okay. What’s wrong with that? MS. MUNNELL: This is not a debate about individual accounts, whether they’re good or bad. The problem that Larry didn’t address is that Governor Bush would cut back on the Social Security benefit a lot. The average guy gets $800 a month under the current program. Under Governor Bush’s program average guy would get $400 from the traditional Social Security program ?? MR. WATTENBERG: Between the employer and the employee’s share of Social Security it’s 12.5 percent? MS. MUNNELL: 12.4. MR. WATTENBERG: 12.4 percent, Bush’s proposing that you take 2 percentage points of that 12.4 and let the recipient invest it. Now, why does that cut the benefit by 50 percent? MS. MUNNELL: Because, first of all, benefits cost 14.4, even though you only get 12.4 in taxes, and that’s the deficit Larry is referring to. Governor Bush does not do anything to make up that hole, Vice President Gore does. MR. LINDSEY: The facts are, that there are six plans that have been scored by Social Security, that have been proposed by members of Congress. They all vary on the details about how you solve this problem. All have personal accounts, all have been scored by Social Security as solving the problem. What Alicia is saying simply is not the case in any of the plans. The General Accounting Office, and the Congressional Budget Office have both looked at Mr. Gore’s plan and they say it does nothing, nothing to solve the Social Security problem. MR. WATTENBERG: We haven’t heard yet about Gore’s plan. Alan, why don’t you tell us what Vice President Gore’s plan is, and then we’ll go on. MR. BLINDER: The Vice President proposes to change a financing system that’s existed since the very beginning of Social Security, under which only payroll taxes spill into the Social Security trust fund. And then, as you said, the fund sometimes builds up, but often it’s just the pay as you go. The Vice President is proposing to put general revenues into the system beginning in the year 2011, which under current projections is very close to the time the national debt is paid off. The current projection is about 2013, and of course nobody knows exactly when, or I might say if, this will happen. But, in any case, a calculation will be made of the interest savings, and then that amount of general revenue will be spilled into the Social Security trust fund, to start filling this hole that Larry mentioned. The easiest way to think about the hole is the trustees now estimate that it’s equal to 1.9 percent of payroll. That is, if you sort of think of time running for the next 75 years, the outlays will exceed the income by 1.9 percent of payroll. What Alicia was referring is if you now divert another 2 percentage points of that payroll out of the system, it’s no longer going into the Social Security trust fund, that short fall is doubled. Then the question becomes, can you realistically expect that the earnings on the private accounts will be so fulsome as to make it all up? And that’s extremely unlikely. MR. LINDSEY: Again, the Social Security actuaries disagree, the combination of personal accounts and the Social Security account will provide at least as much benefits as current law allows. MS. MUNNELL: Can we build on that, because I think there’s agreement, Larry. I don’t want to make a big deal of whether the net is going to be bigger or smaller. The point I was trying to make is, the amount that you get from the conventional Social Security plan will be much smaller, and then you’ll get a portion of it from the earnings on the individual account. MR. LINDSEY: During the 2030s and 2040s, there will be a need to transfer general funds into Social Security. The question is ?? MR. WATTENBERG: Under the Bush plan? MR. LINDSEY: Under the Bush plan ?? MR. WATTENBERG: They’re going to put in general revenues also, but earlier. MR. LINDSEY: Right. But, the difference here is that all of the transfers of general revenue are temporary, and in fact, Social Security is able to 'repay' the money to the general fund. MR. WATTENBERG: Is it not correct to say that the Bush plan attempts to capture returns from the market that Jeremy Segal (sp) at the University of Pennsylvania has analyzed stock market returns over 200 years, and he says, after inflation the return averages 7 percent. You take off administrative costs and you come up with 6.4 percent compounded annually. Albert Einstein said compound interest is the most powerful force in the universe. So the Bush plan is saying, hey, we’ve sort of uncovered this idea that stocks are pretty safe, safer than bonds, they grow very rapidly. If the future resembles the past, or even a little less than the past, because compound interest doubles and doubles, I mean, goes, and goes, and goes, and goes, that it will create a new pot of money that doesn’t exist. Your plan, the Gore plan does not capture that philosophy, is that correct? MR. BLINDER: Yes, except in the private accounts. MR. WATTENBERG: But, the private accounts ?? I mean, as we’re sitting here, are very recent. Until very recently Gore was denouncing this idea as a very risky scheme? MR. BLINDER: He still is. I want to draw the distinction ?? MR. WATTENBERG: Why is it risky if you have 200 years experience with it? MR. BLINDER: Because no one is going to live 200 years, and over a period of 10, or 15, or 20, or sometimes even 30 years the variation in stock market returns can be extraordinary. For example, if you look at the history, and imagine people were in the stock market and they hit 65 in different years, so one hit in 2001 and one hit in 2003, history suggests it wouldn’t be that extraordinary for the benefits of Mr. A to be 20 percent different from Mr. B, by an accident of birth. Stock markets are like that. Over 200 years, surely the stock market, or even a smaller period of time, the stock market is going to outperform bonds. MR. WATTENBERG: It’s going to outperform the 2 percent that you get ?? MR. BLINDER: Hardly anybody has any doubt about that. It would be an extraordinary abnegation of history if that proved not to be the case. The point, however, is there’s tremendous market risk to which the whole corpus of individuals retiring at a particular date would be subject to. And then there’s individual risk. The average person will only be average. There will be a lot of dispersion. MR. WATTENBERG: What you get now from Social Security is guaranteed income. And what personal retirement accounts provide you with are not income but wealth. And wealth and income are very different things. When you own wealth you can bequeath that wealth to your children. When you own a pension stream, you die, they give you funeral expenses, and say sayonara. So isn’t that a difference between these two approaches, one gives you wealth one gives you income? MR. BLINDER: Partly we don’t know the answer to the question, because among the important details of any privatization plan is what are the options at retirement or before. MR. WATTENBERG: Right. MR. BLINDER: For example, some of them spill the whole thing into an annuity, just like Social Security does. We don’t know what Governor Bush would do with that. That’s a very important detail. It could go either way. MR. LINDSEY: Almost all the plans that are out there, the ones that have been scored by Social Security as solving the problem, have elements of the wealth creation that you were mentioning. Archer-Shaw, for example, has inherit-ability, as one of the attributes, as does Gramm. And those are probably two of the more restrictive plans with regard to ownership. MR. WATTENBERG: Just to argue their point for a moment, the Bush plan, to say the very least about it, is very short on details. MR. LINDSEY: The Bush plan, the key to the Bush plan is that we move to personal accounts. This is a threshold decision. This threshold decision ?? we know it is, because Mr. Gore is against it. There are a variety of plans out there proposed by members of different parties to use personal accounts. MR. WATTENBERG: Including Democrats? MR. LINDSEY: Including Democrats. MR. WATTENBERG: Senator Kerry, Senator Moynihan, among others? MR. LINDSEY: Among others, Breaux has ?? MR. WATTENBERG: Senator Breaux, right. MR. LINDSEY: Stenholm, there are a lot of Democrats involved in this who have said very nice things about this approach. In fact, the key issue in the campaign is going to be to decide whether or not we will go down this road. What politics in Washington teaches it that there’s going to be a lot of legislative wrangling about how the details are solved. And it’s going to be bipartisan. This kind of change is going to require support from members of both parties. But, once the public has given the mandate to move toward personal accounts as a part of Social Security, then the president elect, and when he takes office, can spend the political capital necessary to knock heads together to get it in place. MR. WATTENBERG: Okay. So is that fair to say that the argument is going to be about whether there should be personal accounts within the Social Security system? MS. MUNNELL: I think that’s the key difference, whether you cut back on Social Security and introduce personal accounts as part of the Social Security program, or whether you’re adding on. So the lingo is carve out versus add on. And I think Alan and I both love the idea of add-ons, and we both hate the idea of carve outs. MR. WATTENBERG: But, the add on is another government program, it’s $200 billion worth that Vice President Gore, after having denounced Bush for having too many tax cuts, he now says, by the way, I’ve got another $200 billion, and through a system of subsidies we are going to set up 401(k)s for most Americans who choose to participate in it, but not all Americans. You would not have universal personal accounts, whereas under the Bush system everybody ?? MR. LINDSEY: No, the Bush system, the one thing we do know is it’s voluntary. That’s one of the few things we know. MR. WATTENBERG: Okay. It’s voluntary, but anybody who wants them at no extra cost can get them? MS. MUNNELL: But, low income people ?? MR. LINDSEY: At a cost of the loss of their normal Social Security benefit, the conventional Social Security benefit, but no other cost than that. MR. WATTENBERG: But, many of these plans ?? look, if they come up with a plan after all this wrangling that says, we are going to ?? if these perturbations in the market happen we, the government, are going to guarantee you 90 percent of what you would have gotten, anyway. Under current existing legislation, unless we have some change, they’re only going to get 70 percent in the year 2037. So aren’t they ahead? MR. BLINDER: No, because promising that doesn’t do anything. You have to have something behind that promise. MR. WATTENBERG: Well, you have general revenues behind it. You have the most stable rock in the world, which is the fact that politicians are panderers, you’re going to have ?? well, I mean, is there anything more powerful in the world? MR. BLINDER: No, I think it’s very powerful. MR. WATTENBERG: You’re going to have 80 million voters in that age group, trust me, they’re not going to take away the money. MR. LINDSEY: All six of the plans that are out there have a guaranteed benefit in there. So the chances that the political process ?? MS. MUNNELL: Larry, just a fracture, I don’t think that’s correct. MR. LINDSEY: A guaranteed minimum benefit. MS. MUNNELL: A guaranteed minimum benefit, they don’t guarantee current benefits. MR. LINDSEY: A guaranteed minimum benefit, but all the plans have ?? all six. So if you look at the likelihood of what the political process is going to ultimately produce, it’s not going to produce people falling through the cracks. It’s going to produce a safety net, just like you mentioned. MR. WATTENBERG: Let me suggest something else, this is what has drawn me to this idea, pre-Bush. We have had, around the world and in America, for 150 years, a huge raging argument about who is going to own the means of production. Okay. That’s Karl Marx and Frederick Ingles and the guys on the other side. And now sort of, in part by accident, first of all because of the collapse of the Soviet Union, but also through some bizarre mechanics at the Department of Treasury who came up with this 401(k) plan, which was not originally planned, I gather, it sort of evolved, you’ve ended up in the course of 15 years going from about 15 percent of Americans owning equities to about 52 percent now, which is unbelievable. You have more than half the people in America now owning a share of the means of production. Some of it is very small, but when it compounds it’s going to be significant, six figures, seven figures worth of money. Now, so half the people are getting that. If we could figure out a way that the other half get it, we will have driven a stake through the heart of Marxism that will never get out, because you’re saying, who owns the means of production, we do. Is this not a good idea? MR. BLINDER: Everybody thinks it’s a good idea to build personal wealth, and I think everybody thinks, or most people think it’s a good idea to help the less fortunate to build some wealth. And that philosophy is exactly what drives the extraordinary match that’s in Vice President Gore’s proposal. Three dollars for one, if you put in money. MR. WATTENBERG: This is his add on proposal, not in Social Security. MR. BLINDER: Correct, the add on. The point you want to make, it doesn’t matter whether you call it inside Social Security, outside Social Security, is do people have wealth. MR. WATTENBERG: I mean, what yours is doing is expanding an IRA account, in effect. It’s saying ?? MR. BLINDER: Yes, or a 401(k). MS. MUNNELL: A national 401(k) plan. MR. WATTENBERG: It’s saying, we are going to contribute, in addition to a tax deduction to the IRA plan, we’re going to give you some of the money to put into the IRA plan. MR. BLINDER: Yes, it’s a big step. MR. WATTENBERG: But, it is the government giving people money, his money to you, or your money to him, to say invest it. MR. BLINDER: It’s a tax cut, it’s a tax cut targeted ?? a tax cut that you get by saving. That’s what it is. MR. LINDSEY: It is and it isn’t a tax cut. It really is a transfer, the people who are getting the three-four match don’t pay taxes. This is really an additional welfare payment. It doesn’t mean it’s necessarily wrong, but it is not a tax cut. It’s taxing some people to pay for the savings of other people. And it’s interesting, when you mentioned FDR at the beginning, two things FDR did not want to do ?? MR. WATTENBERG: Franklin Roosevelt. MR. LINDSEY: Franklin Roosevelt, was to turn Social Security into a welfare program, either by general revenue financing, which is what Al Gore is proposing or by this kind of explicit welfare type transfer that AL Gore is also proposing with these add on savings accounts. I really think that we’re breaking the model that FDR laid out under Gore’s proposal. We’re turning ?? Mr. Gore’s proposal is turning Social Security largely into a welfare program, instead of a program in which people make contributions and get benefits tied to those contributions. MS. MUNNELL: He’s proposing not to change the current Social Security program, he’s proposing to pump more money in, and I agree with you. I think it is risky putting general revenues in. The reason I like this proposal is that it’s a well defined proposal. It’s linked to a specific savings. So it’s a long one-shot, but it’s a one shot deal. It’s not sort of saying, let’s sort of forever finance part of the program from general revenues. MR. LINDSEY: I’d like to answer the question which you had asked, because it’s a good question. A major problem is that we’re not starting with a clean slate now. We’ve had a history from 1935 to the year 2000 in which on average, and in some cohorts by extraordinary amounts the recipients have pulled out vastly more than they put in, no matter what interest rate. There’s a famous woman ?? Alicia will remember her name. MR. WATTENBERG: Ida Fuller. MR. LINDSEY: Ida Fuller, thank you. Who took out I don’t know how much from $120 or something like that. She’s an extreme case, but as you move through time, because of this transitioning, the people that have already met their maker and the people that are currently drawing Social Security benefits have pulled out much more than they have put in. So no you have to say, what are you going to do about that. So one answer is, I’m going to fill the hole, the entire hole by the payroll tax. Well, we don’t think that’s a very good idea. Another answer is to say, let’s broaden that, and take some tax revenue that’s raised in a less regressive form, like general revenues from the income tax ?? I mean who knows which dollar of revenue, those are corporate taxes and income taxes, just general revenue, but not exclusively payroll tax, and fill part of the whole that way. If you think about it like that it doesn’t sound like a welfare system, it sounds like who is going to pay for the goodies that have already been given out? MR. WATTENBERG: We are out of time. Let me ask a general question, one, two, three. I was recently at a meeting that had people from around the world, economists, politicians, whatever, and the general tenure was that this system of personal accounts in one form or another was coming throughout the world, because of the low fertility rates, and the baby boom, and all this kind of stuff. You already have it in Chile, you have it in England, you have it in the Netherlands, you have it in a lot of places and it’s for a lot of countries, perhaps not the United States, it’s the only way out. Is it your view, respectively, that regardless of this campaign, is that the way we’re heading, personal accounts invested in markets or pensions? MR. BLINDER: If you mean by that carved out of the existing Social Security system, I think it’s not inevitably headed that way. If you mean by that more generically, are people gradually going to take more responsibility, because ?? MR. WATTENBERG: Because they’re facing these Social Security short falls that are inevitable demographically. MR. BLINDER: I think the answer is yes. And part of the Gore’s proposal, the new account, pushes in that direction. MR. WATTENBERG: And you think that’s a good idea? MR. BLINDER: Sure, once you’re above the guaranteed minimum. MS. MUNNELL: But, I think it’s more of a problem in other countries than here. We have a very modest Social Security program. So when they’re talking about cutting back and adding individual accounts, they’re cutting back from $1600 a month to $800 a month. I think our modest program we can maintain as is, and then add on. MR. WATTENBERG: And our short fall is much more modest, because we have a growing country demographically. MS. MUNNELL: Our short fall is modest compared to other countries, yes. MR. LINDSEY: I think the reason it’s inevitable is it gives people more freedom. It gives people freedom to decide when they want to retire. People know their own life expectancies better than the government does. It ends a one size fits all proposal, and gives people options. I think that is a very popular approach. It also happens to be good for the national economy, and that’s why I think we’re going to move that way. MR. WATTENBERG: Okay. I want to know my life expectancy. Thank you very much Alicia Munnell, Larry Lindsey, and Frank Blinder And thank you. We at Think Tank we encourage feedback from our viewers via email, it’s very important to us. For Think Tank, I’m Ben Wattenberg. ANNOUNCER: We at Think Tank depend on your views to make our show better. Please send your questions and comments to New River Media, 1219 Connecticut Avenue, Northwest, Washington, D.C. 20036, or email us at thinktank@pbs.org. To learn more about Think Tank, visit PBS Online at pbs.org. And please let us know where you watch Think Tank. This has been a production of BJW, Incorporated, in association with New River Media, which are solely responsible for its content. Additional funding is provided by the John M. Olin Foundation, the Lynde and Harry Bradley Foundation, and the Smith Richardson Foundation. (End of program.) Back to top  Think Tank is made possible by generous support from the Smith Richardson Foundation, the Bernard and Irene Schwartz Foundation, the Lynde and Harry Bradley Foundation, the John M. Olin Foundation, the Donner Canadian Foundation, the Dodge Jones Foundation, and Pfizer, Inc. ©Copyright Think Tank. All rights reserved. 
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