Tuesday, August 4, 1998; Page A14
Last week's session, in Albuquerque, dealt with proposals to invest Social Security funds in the stock market rather than entirely in relatively low-yield government bonds, as now. Among the turns in the discussion were these:
Just about everyone agrees there will have to be some benefit cuts in the future. But what's the right standard for measuring and describing them? The description will matter enormously when the time comes to vote. The normal comparison would be with the current benefit structure -- Jones is proposing a benefit cut of X percent -- but the current structure is itself unsustainable without a significant increase in either taxes or borrowing or offsetting cuts in other government programs. Maybe the right way to judge these proposals is not how much are they going to cut but how much of the cut that was likely to occur anyway are they going to avert?
Several economists made this point. So, in a way, did the president when the discussion turned to the pros and cons of privatization. Most privatization schemes have what are called transition costs. Depending on the extent of the scheme, these can be quite high. For a while, the government ends up running two retirement programs -- the existing, pay-as-you-go system for the older part of the population and a new, compulsory savings system for the younger part. To finance both at once, it has to raise extra funds. But as the president observed the other day, sticking with the present system will likewise require extra funds, if not on the revenue side of the ledger then in the form of benefit or other spending cuts. "There's going to be a transition cost regardless," he said. There needs to be a way to match up the full cost of these alternatives, not leave parts out, as the proponents sometimes try to do.
To pay part of the cost, the president indicated he might be disposed to support some investment of Social Security funds in stocks, so long as it could be safely done. But he himself noted a possible twist, even here. If Social Security funds are shifted from government bonds to stocks, the Social Security system comes out ahead -- gets a higher rate of return. Other investors then buy the bonds, but at what price? Do they exact a higher rate or settle for less? Who loses if Social Security wins? No one's quite sure.
Likewise, there are two ways to do the possible investing. The government could do it, but some people faint at the prospect of even the most august of government agencies playing the market.
The alternative favored by privatizers is to let individuals manage their own accounts, but what then happens to the Social Security guarantee if the market collapses? Supporters say the higher rate of return from stocks washes out this risk, but former Congressional Budget Office director Robert Reischauer warned that while that was "quite right on average . . . there is no Lake Wobegon effect here. Everybody can't be above average."
The president said Social Security should be reformed "in a way that protects the guarantee," insofar as possible. That's a principle that can lead in a lot of different directions, but it's the right place to start.
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