Outlook: Social Security

To some people, establishing personal accounts as part of the Social Security program is a matter of political faith. But how would the accounts work in reality? Alicia Munnell, an economist and professor of management at Boston College, says in an article in Sunday's Outlook section that there's no need to guess. She has studied the experiences that other countries -- such as Sweden, Britain and Chile -- have had with private accounts as well as the U.S. experience with 401(k) plans. Her conclusions? First, most people are pretty clueless with regard to investment decisions. Second, the costs of operating a system of private accounts turn out to be quite high, and it's the investors who inevitably end up footing the bill. If the United States does go ahead with privatizing Social Security, she says there are some important lessons to be learned from these past experiences.

Munnell discussed her article, Keep It Simple, on Tuesday, Jan. 25, at 10:30 a.m. ET.

Munnell has had a distinguished career. She was senior vice president of research at the Federal Reserve Bank of Boston, assistant secretary of the Treasury for economic policy and a member of President Clinton's Council of Economic Advisers. She is currently director of Boston College's Center for Retirement Research.

Editor's Note: Washingtonpost.com moderators retain editorial control over Live Online discussions and choose the most relevant questions for guests and hosts; guests and hosts can decline to answer questions.

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Los Angeles, Calif.: As a 30-something, I can only see two possible outcomes for Social Security over the next 20 to 40 years:

a. It won't be around
b. My generation will be taxed to death so that the Baby Boomers can retire and then leave the program bankrupt for later generations

"B" is the likely answer since:

a. Our political and economic system rarely looks beyond next quarter
b. Our political system consists of entirely Baby Boomers, who have never shown themselves to look beyond their own generation's needs

Call me a cynic, but if I get a Social Security check when I retire, great, but I'm not counting on it.

Alicia H. Munnell: Social Scurity will be around and you will not be taxed to death. The Social Security actuaries say that raising the employer and employee tax each by one percentage would provide enough money to cover benefits for the next 75 years. One percentage point is not nothing, but hardly fits the "taxed to death" prediction. The alternative of course is benefit reductions. They would amount to about 20 percent -- holding harmless those 55 and over.

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Boise, Idaho: Assuming that every program has "winners" and "losers", using your own definition for "winning" and "losing" would you identify which population under the current Social Security arrangement would be newly classified as a "winner" and which would be a "loser" under the privatization scheme. Thanks.

Alicia H. Munnell: The winners would be those who have the investment savvy and financial flexibility to weather market downturns when they near retirement. The losers will be low income people who take on more risk than they can afford, and end up with inadequate benefits.

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Glastonbury, Conn.: Your last paragraph would seem to indicate that it is economically possible to correct the problems other nations have had with privatized accounts (and we have had with 401(k)'s). But do you think it's politically possible?

Alicia H. Munnell: Yes, I do. A consensus seems to be emerging among economists, financial service providers, and policymakers that accounts need to be automatic and easy. The government already permits automatic enrollment for 401(ks and automatic rollovers when people change jobs. The missing link is some balanced portfoio that can serve as a default and which involves automatic rebalancing as people age.

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Dayton, Ohio: Ms. Munnell, the current discussions seem to be missing the fundamental question: What is the point of Social Security?

Is it supposed to be a retirement program? Or is it, fundamentally, a welfare program to protect those of the poor who happen to be old.

Rather than tinkering with percentages here and there, I wish we as a nation could have a real, meaningful decision about what we want it to BE, then decided how it should work.

Alicia H. Munnell: Social Security is a social insurance program -- not a welfare progrtam. Its strength rests with the fact that everyone contributes and everyone benefits. Because of its broad-based support and participation, Congress does not make capricious changes to the program and benefits involve no stigma.

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Frederick, Md.: With all the noise about Social Security going bankrupt why isn't there more emphasis on the fact that it was NEVER intended to be a sole source of income in retirement? Anyone, regardless of age, who thinks they can live on that check alone is kidding themselves.

Secondly, why would anyone believe a system of self investment work? Look at all the people who invested 100 percent of their 401K in Enron stock. We're a nation that only looks for short term high returns and pays the minimum balance on bloated charge accounts.

Alicia H. Munnell:
I agree. Social Security was never meant to be a sole source of income. Indeed, today the average person receives only $1200 in monthly benefits, and that amount -- in today's terms -- is scheduled to decline under current law. People need to save either through pensions or on their own to maintain their standard of living in retirement.

You are right, we have tried private accounts in the form of 401(k)s, and people have made mistakes at every step along the road. Private accounts of any form need to be very automatic and easy.

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Washington, D.C.: Your arguements against some privatiztion would provide great teaching opportunities for the financial illiterate.

When I first participated in a 401K plan in 1992, I was amazed at how very little money contributed turned into a bonanza about a year later. Even with the bear market of the 2000s, I'm way ahead.

The key: dollar cost averaging. Not a difficult concept to explain!

Remember Einstein said the most powerful mathematical formula is the miracle of compound interest!

Alicia H. Munnell: You are the exception. The average person approaching retirement -- with a 401(k) plan -- has less than $50,000 in that account. $50,000 provides about $350 per month.
Late participation, cashing out, and poor investment choices have led to low balances for most people. You did well!

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Scarsdale, N.Y.: Your Outlook column was not helpful to the President's plan for personal accounts. I am a trader on Wall Street and I give substantial funds to Boston College, my alma mater. I'm going to have a chat with my development officer about your work. Prepare your defense.

Alicia H. Munnell: I welcome a discussion. My goal is simply to put the facts on the table. Once everyone is well informed, they will be able to make their own choice. We should talk.

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Arlington, Va.: As a BC grad, (A&S '91), I am really proud of the work done at the Center for Retirement Research. The collection of papers there represent a wonderful resource, both for the mass public audience as well as for those looking for more nuanced methodological approaches. I haven't donated to BC since they put President Bush on the cover of BC Magazine at the start of the Iraq invasion, but I may reconsider given your work and that of SOA Watch at BC. Thanks again.

Alicia H. Munnell: Thanks for your nice remarks.

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Richmond, Va.: I am a 38-year-old. I have calculated what I have already paid in SS tax, plus estimated what my future payments will be. Assuming average probably returns, I would have a HUGE nest egg at age 65 which would yield me more retirement income than the Social Security system. Is this exhilaration common with people my age, or younger? And, is this more about generational "warfare" than opinions in economics?

Alicia H. Munnell: Your contributions to Social Security cover not only your own benefit but also pay some of the legacy cots associated with the fact that we paid benefits far in excess of contributions in the early years of the program. There is no way for the country as a whole to avoid these costs. Moreover, remember that Social Security provides an inflation-adjusted annuity, something virtually unattainable in the private market.

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Annapolis, Md.: Say an individual invests a substantial portion of his or her funds in speculative investments. Say these investments lose all their value. Won't there be a minimum benefit that Social Security will provide to all individuals? Now this person qualifies for the minimum benefit, but the Treasury does not have the funds to pay him or her. Haven't we been down this road before with Savings & Loans using Federal deposit insurance (the old FSLIC) to make speculative loans? Didn't the safety net of deposit insurance allow these S&Ls to gamble with government money?

Alicia H. Munnell: Any guarantees associated with private accounts create a "moral hazard." That is, if the participant does well with a speculative investment, he wins. If he does poorly, the government, i.e. the rest of us, loses. On the other hand, the absence of guarantees means that some people may end up in poverty.

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Arlington, Va.: Do you believe that the Federal government's THRIFT plans for its employees are a good model of easy investments?

Alicia H. Munnell: The thrift plan is a good model in that it has few investment choices, limited opportunities for changing allocations, few statements, and therefore low administrative costs. Questions of rebalancing with age or in reponse to market returns probably still remanins a problem. An aged-based portfolio would help in this regard.

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Omaha, Neb.: If this stock market investment is such a sure winner, why doesn't the Social Security system hire an investment manager similar to CALPERS and make this pile of free money for the retirees instead of loaning it to the Congress at below Market rates? My suspisions are it's because it is recoginized as a serious gamble and is therefore quite risky. After all the cost of administration of Social Security benefits in there present form are far below the cost of administring private insurance benefits. That means more of the savers dollars are eaten up by third party costs.

Alicia H. Munnell: Investments in equities produce higher expected returns precisely because they are more risky. An assessment of the impact of equities must take this additional risk into consideration. The Congressional Budget Office and the Office of Management and Budget both risk-adjust returns when considering equity investments in public programs.

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Albuquerque, N.M.: When did the government begin to use Social Security funds for other purposes?

Alicia H. Munnell: The government has never used Social Security surpluses for other purposes. Rather the surpluses in Social Security mask large deficits in the non-Social Security portion of the budget. The surpluses resulted from legislation enacted in 1983.

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Arlington, Va.: I am 31 and I think one of the biggest concerns that someone of my age is that the baby boomers are not being asked to make the same sacrifices that people older and younger are being asked because they failed to make the necessary adjustments to thier lifestyle -- i.e. not saving enough. I have yet to see a proposal put forth that answers this concern.

Alicia H. Munnell: No one is saving enough these days. baby boomers and subsequent generations ware going to find that they will not be able to continue to retire at age 62 -- the typical age today -- and maintain their pre-retirement lifestyle.

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New York, N.Y.: I think your first questioner from Los Angeles should take some time and ask her parents and anyone she knows over 50 how well prepared they are for retirement and what they can expect from their employer. There was a time when people worked for companies who gave them pensions and health insurance upon retirement -- those companies barely exist. Lots of people learned this when their retirement benefits were already in force -- many lost health benefits and found their "pensions" being administered by the PBGC (which is now itself broke). You read every day about United Airlines and many other companies that are going to court to rid themselves of their pension obligations. I'm sure Los Angeles believes in an "ownership society" but when she discovers that it simply means she has to pay for everything herself maybe she'll begin to understand why we need a saftey net.

Alicia H. Munnell: Right. The decline in defined benefit plans means that few will have a relaible stream of income once they retire. Balances in 401(k) plans -- less than $50,000 -- for those approaching retirement will prove a disappointment for many.

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Burke, Va.: Have you heard that the privitizers are thinking about linking Social Security benifits to race and sex?

Alicia H. Munnell: No I have not.

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Holding harmless those 55 and over: Sorry, but why?

Being on the top end of Gen X, who cares? The folks you are protecting are the very self-same idiot Boomers, who demanded tons of social spending when Mommy and Daddy were paying the taxes (deficit). Then when they started paying, they voted in Reagan and our present wonderboy to cut their taxes (more deficit).

Let them pay more in taxes, or have lower benefits, too? Why should only Xers and Ys get hosed over? We didn't cause the problem.

Alicia H. Munnell: The notion is that those in retirement and approaching retirement have neither the time nor resources to adjust to major changes in their expected Social Security benefits.

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Cleveland, Tenn.: It seems to me that the only version we receive is that of the administration. There is almost no good articulate presentation either in the printed media or the electronic. There are columnists who dissent, but there is nothing in the major "front page" stories or headlines. It almost seems that the media are taking all the administration claims at face value

Alicia H. Munnell: Our Center for Retirement Research at Boston College has put out some pieces that try very hard to put forth objective information on this topic. Check out our website at www.bc.edu/crr

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Richmond, Va.: Changes to national retirement systems have been tried elsewhere. Do you know of a single country that has changed their retirement system along the lines proposed by the Bush administration that has had the positive results predicted?

Alicia H. Munnell: Positive resyults are claimed for Chile, but it started in a much different place. Its Social sceurity system had imploded and its capital markets were undeveloped. Chile's system of private accounts helped both problems. Our Social scveurity system works well and our caoital markets are highly developed so it is not clear whether the Chilean example is relvant.

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Atlanta, Ga.: One area that I have never really seen discussed is that of control and selection of investment options. As a youth in California in the 1980s, I was witness to the city and local governments banning any investment in a company that had assets or investments in aparteid South Africa. This was done for obvious political reasons. What would prevent a modern equivalent? By making choices simpler, are we not really saying that we are going to allow the government to make many of our investment choices -- or at least define the universe of acceptable investment choices -- for us?

I do not trust the motives behind making those choices and I do not trust future politicians not to play politics with the trillions of dollars that will be floating out there subject to their jurisdiction. There will be huge profits for those who are approved as investments (companies) and investors (brokers/funds). With what the Bush administration has shown recently, good luck getting to be an approved investment broker if you were not at least a Pioneer level donor to his campaign.

Secondly, if the government is largely going to decide how we invest (i.e., lifestyle funds), why doesn't the government just make all investment decisions and reap the benefits of economy of scale (huge volume of Social Security accounts rather than each of us on our own)?

Alicia H. Munnell: I have long been an opponent of "social investing." I think it is possible to limit choices, however, by identifying a few broad-based indexes such as the Wilshire 5000 or others that include virtually the entire market. Government central investment would be much cheaper and with broad indexes could avaoid the government "picking stocks."

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Anonymous: The problem, as I undestand it, is how to make sure the Social Security system can continue to pay adequate benefits to retired workers as the American population ages and the ratio of retired workers to workers, i.e., of those supported by the system to those supporting them, increases. The problem is real though it may not the imminent "crisis" Bush & Co. claim. In any case I am at a loss to understand how exposing the system to the uncertainties of the stock market can stabilize it and ensure its solvency. Can you? If so, please explain.

Alicia H. Munnell: This is one of the toughest isssues. Stocks have higher expected returns so if people are allowed to put their payroll tax money into stocks, it looks like a painless way to bring in money to the program. The problem is that stocks involve both higher returns and higher risk. Any calculation that does not account for the higher risk is misleading. The government's "scoring agencies" use risk adjusted returns -- that is, they essentially assume that assets earn the bond rate -- when making projections.

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Austin, Tex.: Why doesn't the Federal Government run Social Security like any other private pension plan? That is have investments not only in U.S. Treasury Bonds but in the Stock Market, real estate, etc., as well. I think Clinton's treasury secretary Rubin propsed the idea in the early 80s and it went nowhere. The cost of administering the program would be cheaper than having private accounts and the Federal Government could take on some of the downside risk.

Alicia H. Munnell: It could be done. Remember though that Social Security essentially operates on pay-as-you-go basis, and to build up more assets requires putting more resources into the program.

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Long Beach, Calif.: Should more historical perspective be given to Social Security? For instance, the fact that Socialists brought us the 40-hour week, and the concept of a social safety net? Or the fact that big business provided close to nothing for retirement or disability, and spent their profits hiring goons to beat up people asking for a living wage and the right to grow old outside of a poor house. Wall Street is no savior, or have we forgotten our history?

Alicia H. Munnell: Social security has been one of our most successful programs. Today, 67 percent of households 65 and over receive more than half their income from Social Security.

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Chippewa Falls, Wis.: What is your opinion of the reason the Bush admninistration portrays the Social Security funding problem as an imminent crisis (I listened to GWB state "the crisis is now"), yet blows off the more serious problem of Medicare funding? On that issue GWB states all of the economists are wrong, and the drug benefit will actually save money in the long run by preventing surgeries.

Alicia H. Munnell: You are right. Medicare is a much bigger problem. Although to date we have little evidence, few think that the prescription drug legislation will save the program. The consensus is that the drug legislation has added to the program's long-term defcit.

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Washington, D.C.: The answer to any Social Security funding shortfall seems obvious to me. Raise the cap on earnings that are subject to Social Security taxes. As I understand it an individual's earnings are exempt from social security taxes after $90,000. If, as the president suggests, we are truly facing an imminent crisis why not simply raise this cap? I would have to assume that a relatively small increase would pump a great deal of money into the system. If the goal is to "save" social security isn't this is a far simpler, far cheaper and, far more direct solution then personal savings accounts would be?

Alicia H. Munnell: Many policymakers -- both Republican and Democrat -- have proposed raising the cap. In 1983, the cap was set to incorporate 90 percent of total earnings. Because of rapid wage growth at the top, that percentage has declined sharply. Restoring the 90 percent threshold would go a long way towards solving the problem.

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Saint Louis, Mo.: How is the money taken from Social Security by government agencies accounted for? Do they ever pay it back? I hear this all the time and I don't know how to answer these questions.

Alicia H. Munnell: Government agencies cannot take money from Social Security. What's happening is the surpluses in Social Sceurity mask deficits in the rest of the budget. When needed to pay benefits, the Treasury will redemm the bonds for cash. The idea that the government might default on this commitment -- sugested by some -- seems virtually impossible.

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Alicia H. Munnell: Thanks to everyone who has participated in this discussion. We all need to have more sessions like this.

Alicia Munnell

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