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Social Security Reform

A debate with experts on President Bush's Commission recommending younger workers invest a portion of their contributions in the stock market.

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  • MARGARET WARNER:

    Now, to debate the commission's recommendations, we turn to one member of the commission, Robert Pozen, who is vice chairman of Fidelity Investments, the brokerage house; and two observers of the Commission's work, Maya Macguineas, a fellow at the New America Foundation, she served as a Social Security adviser to the Presidential campaign of Senator John McCain; and Peter Diamond, Professor of Economics at MIT. Welcome to you all.

    Mr. Pozen, to you.

  • ROBERT POZEN:

    Thank you.

  • MARGARET WARNER:

    As Susan just outlined, the president asked you to come up with a system that had private accounts but also did something to ensure the long-term solvency. Did you achieve both goals?

  • ROBERT POZEN:

    Yes. Currently the system is not financially sustainable. If we do nothing by 2038, we will either have to have a benefit cut of roughly 28 percent or we'll have to have a substantial increase in payroll taxes. Now we did two things: First of all, in Plan 2 and 3, we proposed a way to slow down the growth of benefits but not to reduce the growth. The benefits will still be higher than they currently are, but we did constrain the growth of benefits. Then we said to people, if you want to voluntarily, you can have these personal accounts, and that gives you a way to get some, if not all, of those benefits back and to come to a total that exceeds that.

    The other thing we did is we made the system much more progressive. We did that, for example, by creating a poverty line benefit for the first time. Now if you work 30 years at minimum wage, your Social Security benefit does not reach the poverty level. We will now reach 120 percent of poverty level. Second of all, we increased widows' and widowers' benefits for the survivors as long as you're in the lower half of the income group. We will bring them up to 75 percent of the working spouse. So that's another very progressive thing for people in the old age. And third of all, we treated people in divorce better. Right now if you get divorced and you're married less than 10 years, the non-working spouse essentially gets nothing. We provided that if you have this personal account, it will be split 50-50 no matter what.

  • MARGARET WARNER:

    And did you address the solvency issue?

  • ROBERT POZEN:

    Yes. I would say that we made some big steps in plan 2 and 3 towards solvency, and that by the end of the 75- year period we have reduced the unfunded deficit by between 55 and 70 percent. And more importantly, we're in a cash flow positive position and moving in the right direction. So while we couldn't cure the whole thing within that period, that period is a little artificial. And, if you look at this as a continuing thing, we are in the right direction and going forward.

  • MARGARET WARNER:

    All right. Professor Diamond, how does it look to you?

  • PETER DIAMOND:

    Well, there are two problems with — let's stay on plan 3. One is it needs a lot of revenue. They haven't specified where this revenue is going to come from. After the big tax cuts and the recession and the terrorism expenditures, there's no surplus to finance it. So there's a big need for taxes and they didn't say where they're coming from. Secondly the individual accounts don't help with solving this problem. The way those accounts work is you can borrow from Social Security to invest in stocks. And then you pay Social Security back out of your retirement benefits. But Social Security….

  • MARGARET WARNER:

    You mean because you've accepted reduced guaranteed benefits?

  • PETER DIAMOND:

    That's right. So it's a loan that you have to pay back out of your guaranteed benefits. But Social Security doesn't have the money to lend you so they have to borrow it from the federal government. But the federal government doesn't have the money to lend Social Security. So they have to borrow it from the public. It's not clear that these accounts are accomplishing a whole lot.

  • MARGARET WARNER:

    Ms. MacGuineas how does it look to you?

  • MAYA MacGUINEAS:

    Well, I actually take a much more positive view of what the Commission did because I think the task laid out before it was very difficult. Social Security is facing huge financial deficits. We've known this for decades. And yet there hasn't been much progress on moving forward. This Commission historically came to a consensus on that front. I think the two and.…the second and third plan that we talked about both achieved more than just moving towards financial solvency. They do a lot to diversify the demographic risks that we currently face that are part of the problems that were in the system. Over time they'll provide higher return for participants and they'll create wealth and ownership particularly importantly I think for the 50 percent of people in the low end of the income spectrum who currently don't have savings.

    In terms of the specifics again I'm pleased for two main reasons: I think they included very important components of their private accounts plans — the first being that they did make these accounts progressive. And that's really important. Social Security serves two purposes: It's both an insurance system against outliving your savings in old age and it's a re-distributive social insurance program. I'm glad to see the Commission kept both of those components in there. Secondly they include very responsible restrictions both on how you would be able to invest these funds — you can't invest in whatever you want — they have restrictions on them and on how you can withdraw these funds. That said, I do have one….

  • MARGARET WARNER:

    Go ahead.

  • MAYA MacGUINEAS:

    That said I do have one point where I think the Commission could have done better. That is in restoring the long- term solvency of the program. By that I mean that there's not a lot of agreement on this issue between the two sides in the debate. If there's one thing….

  • MARGARET WARNER:

    On the privatization issue. Is that what you mean?

  • MAYA MacGUINEAS:

    And how to reform Social Security. But if there's one thing that both sides do agree with, that's we need to increase national saving. That will help economic growth and help the Social Security system. The problem that Peter Diamond was starting to point out is if you borrow on one hand to pay for the saving on the other hand, you're not going to create as much gain in the economy. I think that's potentially one of the most important benefits of private accounts. So I'd like to see the Commission or however we implement Social Security reform move a little bit farther in that direction.

  • MARGARET WARNER:

    Mr. Pozen, let me see if I can sum up a lot of these concerns. They seem to be that in the end to make…to get these private accounts going and to try to restore some solvency it going to require, one, that recipients accept these cuts in guaranteed benefits but, two, that the government is still going to have to pump a lot of new money into the system. Is that fair to say?

  • ROBERT POZEN:

    Let me address the first one. First of all there are no guaranteed benefits. We have a system that is financially unsustainable.

  • MARGARET WARNER:

    You mean right now.

  • ROBERT POZEN:

    Right now there is no such thing as a guaranteed benefit. What people would be doing voluntarily is accept a lower growth in the rate of benefit and in return they'd have the ability to get a higher return in a personal account. And we've run projections at the actuary's required rates. And the total of the traditional benefit plus the personal account would equal or exceed– in both plan 2 and 3– the benefits that people would have gotten in the year 2052. Now the borrowing question….

  • MARGARET WARNER:

    Let me interrupt you this and just get Professor Diamond to respond on that question.

  • ROBERT POZEN:

    Sure.

  • MARGARET WARNER:

    Professor Diamond, do you agree that for a worker, say, 30 or 35, that this would be a good bet that in the end, as Mr. Pozen said, you would be better off diverting some of your payroll savings into a personal investment account?

  • PETER DIAMOND:

    Well, with these accounts people have to pay back whatever is done with the rest of the benefits.

  • MARGARET WARNER:

    Right.

  • PETER DIAMOND:

    So while the other benefits may get changed, the payback has to be done. So the important thing to recognize is you only get higher returns by taking on more risk. People are borrowing at a certain rate of interest and then investing it and maybe they'll do better and maybe they'll do worse, and certainly over the long haul, people tend to do better but people already have quite a bit invested in stocks. It's not clear investing more in stocks and borrowing to do it makes a whole lot of sense for a lot of people.

  • MARGARET WARNER:

    Mr. Pozen.

  • ROBERT POZEN:

    We don't only offer people the opportunity to invest in stocks. If people want to, they can invest in inflation protected government bonds. And even under those assumptions they would come out roughly the same. We also provide balanced accounts with half stocks and half bonds. And if you look over 20, 30, 40 years, you can see that in any 20, 30 and 40-year period these do better than the returns that people are getting now from Social Security. That isn't to say that in any one year there wouldn't be a problem. But this is a 20-, 30-or 40-year situation.

  • MARGARET WARNER:

    Okay now, I interrupted you earlier. You were going to address the point Ms. MacGuineas had raised about whether you really did enough on the solvency point.

  • ROBERT POZEN:

    Well, I think there is a transitional financing issue. When you're moving from a totally pay-as-you-go system to a funded system, and you start off with a $5 trillion, roughly, unfunded liability, then there is a transitional financing issue. And we've tried to estimate that roughly. And the reason there's a transitional financing issue is because when people accept this lower scheduled benefit in order to get the chance to invest their personal account, that comes in, that kicks in later as they get toward retirement.

    So you can view this as a borrowing. It's a timing question. And the real question, like any borrowing question, is over time are you going to be able to pay that back? I think that if you do the projections, not just within the 75 years but you go out 100 years and you go out to these demographics levels you'll see that we can pay back the borrowing.

  • MARGARET WARNER:

    You're saying, let me just make sure I'm clear — you're saying, yes, the government would have to pump, you say, it could be up to $70 billion but would have to pump some money into it but over time….

  • ROBERT POZEN:

    Over time the obligation of the government to pay traditional benefits would be reduced, and therefore it would be able to pay it back. This is the most important question is, what happens at the end of the 75-year period? Is your unfunded liability bigger or smaller than it is now, and it would be substantially smaller and it would be decreasing because at that point you would be in positive cash flow and so you would be in a better situation.

  • MARGARET WARNER:

    Ms. MacGuineas, what about that point? Short term crunch but over the long term this will do it….

  • MAYA MacGUINEAS:

    That's right. That's exactly the situation with private investment accounts in that they cost money to start. They cost a lot of money to start. That's the transition cost. But this is money put to good use because it's invested. It's also money that's put to better use if you don't borrow other money to invest it but rather actually lower your consumption. The only way you can increase saving is by decreasing consumption.

  • MARGARET WARNER:

    All right, but apply it to this plan. Are you saying the government should put this money up front now?

  • MAYA MacGUINEAS:

    What I would say and I think that the Commission's hands were tied on this front because the principles put forth by the president were really very limiting. But I think that we need to do is make some of these tough choices sooner rather than later. The way that we're going to reduce consumption is either reduce government spending or benefits sooner rather than later or increase taxes. It's not through borrowing and it's not through sort of wishful thinking that we can fund this from the rest of the budget. So while the people on the Commission, I really think made many of the tough choices did a great job and couldn't have done much more than they were able to, I would like to see an actual plan that's implemented, make some of these changes sooner.

  • MARGARET WARNER:

    Professor Diamond, do you want to weigh in on that point?

  • PETER DIAMOND:

    Well, the benefit cuts are a big part of the positive cash flow. And, in thinking about the benefit cuts, two things: First of all, the less outside money that comes in, the bigger the benefit cuts have to be. And they don't specify where this money comes from. It's just a magical asterisk. And, secondly, the way they've distributed the benefit cuts includes particularly cutting on the disabled who won't have time to accumulate accounts and on children of young workers who die. And the children's benefits will be cut along with the retirement benefits. But again the dead parent won't have time to have built up an account. I think that this allocation of the benefit cuts is unfortunate.

  • MARGARET WARNER:

    Let me go back to…unless you want to respond briefly on that.

  • ROBERT POZEN:

    I think that the, as I said, the survivor benefits are increased. The Commission was not asked to look at the whole question of disability. It is a whole question. The Commission says at the end of its report it's a complicated question and should be subject to another Commission. I also would like to point out in the third plan we do increase savings by having people contribute this additional 1 percent. We do specify in the third plan that there would be some more dedicated revenue. We leave it up to Congress to figure out where the dedicated revenues should come from.

  • MARGARET WARNER:

    And you've suggested that the whole country needs to take at least a year to debate this thing before doing anything, right?

  • ROBERT POZEN:

    I think it's a complicated subject. It will take at least a year to debate and then hopefully we can have a good debate and move forward on some plan that seems reasonable to the most… to the most people.

  • MARGARET WARNER:

    All right. Thank you all three very much.

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