QUESTION: Can you just clarify whether or not this does address the 'crisis,' or is this -- are we correct in reporting if you say this is neutral and yet to be decided as to how you'll basically come up with the money to solve the 'crisis'?
SENIOR ADMINISTRATION OFFICIAL: The president is going to talk about the need to take action to fix Social Security. We're not making representation that the personal accounts alone are fixing the system's finances.
QUESTION: Are they helping at all?
SENIOR ADMINISTRATION OFFICIAL: The personal accounts help in the sense that the personal accounts enable the worker to be better off in the context of a plan to fix Social Security. You could, in theory, fix Social Security finances without a personal account and then the worker would be far worse off than if you offered the personal account. So it's an important part of the overall plan to fix Social Security, because it's an important part of having a plan that, in the end, treats workers well.
When you consider going forward, what we're looking at, in terms of the gap between the system's promises and its ability to pay them, we could be in a very difficult situation in the 2020s or 2030s, with respect to keeping people out of poverty in old age. It's very important that the personal account be a component of the overall solution, because otherwise we're going to have much worse treatment for workers as the plan is fixed.
QUESTION: I wanted to follow up on this -- I'm confused. How could you calculate now, today, that two-thirds of those who potentially are eligible for the personal accounts would make the voluntary option to come into the accounts, if the president is also committed to making the existing Social Security system solvent, the way he says he's interested in doing? How can you even gather what choices they would make if you haven't --
SENIOR ADMINISTRATION OFFICIAL: Well, I would say a couple of things about that. The first is just the technical point that we don't, ourselves, develop the participation estimates -- the Social Security actuaries do. All of the estimates for Social Security's finances are independently generated and we have to operate with them as they are generated elsewhere. So one can question whether two- thirds is the right participation assumption; we think it's important for our purposes to submit to the independent scoring, and so we don't independently second-guess the participation assumptions.
The second question, though, is more with respect to the nature of the election. It's important to understand that no matter how Social Security is balanced, that the nature of the election facing the individual with the personal account is still the same. The nature of the personal account election is that if you, as a participant, are choosing the personal account, the way that decision impacts you is the same, regardless of what we do to fix the system. That election is specifically structured so that the exchange you're making for the personal account benefits is such that you will do better if your account does better than a 3 percent real rate of return. And that's by design and the nature of the personal account construction.
So, regardless of what the starting point is for your overall benefit, the specific trade-off that you're making in opting for a personal account is based on your decision that you think you can beat the 3 percent real rate of return. And regardless of where you're starting, that's still going to be the same decision facing you. So the participation assumption will be based on election that is not changing as a result of that.
QUESTION: Related to this, what are the opportunities for a worker who may opt in at 18 or 20 or 25, to then decide, based on circumstances, either their own or the market performance, that they want to opt out; and then maybe at 40 or 45, they say, oh, the market is doing better, or, my circumstances are different, I want to opt back in -- what happens?
SENIOR ADMINISTRATION OFFICIAL: Well, one of the things that it's important to remember about the nature of the election and the investment choices that we're giving people is that people can, in effect, sort of decide the degree to which they want to receive something like the Social Security defined benefit, or pursue a different rate of return through the investment in bond funds or stock funds. Let me give a specific example.
Suppose you had a person who opted for the personal account when they were young, and then they got buyer's remorse later when they were 30, and they decided, I don't really want the personal account. Well, at that point, they could just have the option of leaving all of their money invested entirely in the Treasury bonds because then, by definition, their benefit is not going to change relative to their promised Social Security benefit because the Treasury bond is earning a rate of interest that is exactly equal to the offset they're giving up for taking the personal account. So in other words, if you have someone who opts for the personal account, all they have to do to replicate their current traditional Social Security benefit is just to leave all their money in the Treasury bond fund. So this effectively gives people after they've chosen the accounts, the ability to decide whether or not they want to continue to make an investment choice that deviates from the Social Security system, or whether they just want to sort of replicate what Social Security would have given them. They'll have that choice throughout their lives.
QUESTION: So they can opt out?
SENIOR ADMINISTRATION OFFICIAL: Well, they can effectively opt out by just going all to Treasury bonds again.
QUESTION: What's the significance of permanence? That's been said about five times. Why is it so important to make a permanent solution? If they tried to do that in the 1930s when they set this up, we could have never anticipated all the changes in the economy that would have happened. We didn't have computers, we didn't know any of this stuff. Why do we have to do something now to take care of all time? And why is the president so insistent on that?
SENIOR ADMINISTRATION OFFICIAL: Well, that's a very good question. If you look back at the history of Social Security, you will see a history of frequent and recurring tax increases. The tax rate was 2 percent -- 1 percent employee, 1 percent employer -- when the system was created. It has had to be raised repeatedly, most recently up to 12.4 percent. If we were to do, say, a temporary fix, then 10, 20 years from now, we'd be right back in the same boat that we are now. In fact, in 1983, they did what was categorized as a 75- year fix. But if you look at the projections that took place since then, starting in 1983, the trustees found the system was insolvent again. And here in 2005, we're facing an actuarial deficit that is about as big as they faced in 1983.
If we were to confine ourselves to a temporary fix, then 20 years from now people would be looking at a deficit just as big as we're looking now. And they'd be looking at a lot of tough choices all over again, except they'd be in a much worse position because the cost of the system would be much higher than they are now. So if we want to break the cycle of perpetual tax increases and handing larger and larger unfunded obligations off to future generations, we need to put the program on a permanently sustainable course.
QUESTION: Can you just explain what looks like will be a massive federal government fund management -- how it has to be run, how many people would it take to run, and how will the fund allocations be farmed out presumably into the markets and on to Wall Street?
SENIOR ADMINISTRATION OFFICIAL: Again, I would just point you to the basic model of the thrift savings plan. The way that it works is that the board of the -- the Federal Thrift Board contracts out -- they put the management of the individual funds up for bid. And there's a competitive bidding process for the ability to manage the different funds. So there are a couple of elements in that that are very important.
If you go back to the debate over the thrift savings plan, you find that a key element of the decision to create the thrift savings plan model was the idea that the accounts would be individually owned, and the fiduciary responsibility of the board was to the individual account holders. This was an important element of preventing the sorts of political interference that you would see potentially if the government just took the Social Security trust fund and started steering it into the stock market itself. So part and parcel of that is creating a system of individual accounts with individual property rights and fiduciary responsibility to individual account holders.
With respect to the actual fund management, that actually would not be done by the federal government. You wouldn't have the federal government managing the funds, but the federal government would be contracting out, and private fund managers would be doing that.
QUESTION: Do you have a sense of how much money would be going into the stock market?
QUESTION: ... they would then be doing that at less than a 30- basis point return? They would have to be presumably bidding in at a 15-, 20-basis point return?
SENIOR ADMINISTRATION OFFICIAL: Much, much less than that. Much less. When you consider the TSP, for example, their total cost is six to eight basis points for the whole system, and the fund-management element of that is a small minority of that amount. It's not -- I can't give you a precise figure on that, but it's much smaller even than the thrift savings plan administrative costs. There's no reason to believe that the fund management fees for a system like this would be any higher. The increase from six basis points to 30 basis points is exclusively because of the record-keeping duties of the federal government, keeping track of the accounts of everyone, all over America.
QUESTION: My question is about progressivity. The Social Security system -- progressivity in it for lower-income workers now. I take it from what you've said -- and correct me if I'm wrong -- there would really be no progressivity on the personal savings account end of this. You're not going to offer matching benefits like a 401(k), or anything that would help poorer workers.
SENIOR ADMINISTRATION OFFICIAL: I wouldn't -- first of all, I do think you'll hear, or at least see later today, a commitment to maintaining the progressivity of the current Social Security system. There's a couple of different ways you can do that. You could have personal accounts that, in and of themselves, are not progressive, but coupled with changes to the traditional system that vastly increase its progressivity. And there are many proposals that do that. You look at something like Kolbe-Boyd, or some of the Commission plans, or Lindsey Graham's plan, they make a number of changes to the traditional system to make it more progressive.
But having said that, the accounts that I just described are actually funded in a progressive manner, at least in the phase-in period that I described. An account that is a 4 percent account, up to a cap of $1,000, is actually a very progressive account. Only people at $25,000 of income and below would actually be getting the full 4 percent. Anyone at $25,000 or above in the first year would actually have less than a 4 percent account. So there is a progressive funding mechanism in the early years of this program.
QUESTION: But no minimum benefit guarantee. That dropped out since model two?
SENIOR ADMINISTRATION OFFICIAL: Well, you're -- that's a reference to specific provisions on the traditional side. And we aren't at that stage yet. But we're not saying yes or no to anything like that. We are saying that overall, we want a system that is as progressive as the current system.
QUESTION: Will the cap keep going up by $100 each year?
SENIOR ADMINISTRATION OFFICIAL: Basically, it's -- obviously, it's our goal ultimately all workers be able to have 4 percent accounts. The details of that, obviously, would be subject to the details of a comprehensive 75-year look at the program.
QUESTION: What would be the tax treatment of the accounts?
SENIOR ADMINISTRATION OFFICIAL: Boy, getting all these good, technical questions.
BUCHAN: That will be our last one.
QUESTION: No, it won't.
(LAUGHTER)
QUESTION: That is going to be subject to capital gains taxes all through their lifetime?
SENIOR ADMINISTRATION OFFICIAL: Well, what we have been assuming in all of our modeling runs is that the taxation of Social Security benefits, whether from the traditional system or from the personal account system, would not change. But that's, obviously, that's a policy decision that extends beyond the 10 years that we're looking at right now. And that's really the withdrawal phase from the accounts.
QUESTION: But is it fair to say that when everybody wakes up tomorrow morning, the president is not going to have given them an answer tonight about the $3.7 trillion shortfall, and that presumably, since he's ruled out higher taxes, that the deal that he goes along with is going to have to come up with $3.7 trillion worth of benefit cuts?
SENIOR ADMINISTRATION OFFICIAL: Well, I'm not sure I would categorize it that way. First of all, the current system is promising benefits that are much, much higher in real terms than the future is now. So we can certainly say that no one's benefits today need to be changed; no one near retirement, their benefits don't need to be changed; and people in the future can get benefits that are at least as high as people are getting today. Beyond that, we're leaving it open to discussions with Congress as to how to fill that $3.7 trillion -- actually, what we think is a $10.4 trillion hole.
END
