Social Security Panel Debates Stock Investments
Is the federal government, in a quest to save the Social Security system, capable of buying into the private stock and bond markets in a huge way without allowing political considerations to influence its investment decisions?
Or should the system instead be rescued by putting the investment choices, and the risks, in the hands of individual Americans who would select which stocks and bonds to buy with some of their Social Security payroll taxes?
Those basic and bitter philosophical arguments raged Saturday as the nation’s advisory council on Social Security held its last formal meeting before making recommendations about ways to preserve the nation’s basic retirement system.
The divided council will soon issue three plans, and touch off a national debate that could last for years over the best way to ensure the solvency of Social Security, which is expected to become insolvent in 2029.
A dilemma Saturday centered on whether the federal government, which has little money invested in private sector stocks and bonds, should be allowed to become the nation’s largest single investor. Under one plan, the government would have $1 trillion in private markets by 2015.
“Is it politically possible to have the government invest in equities on that enormous scale?” asked council Chairman Edward F. Gramlich, who favors an alternative plan. A huge government stock and bond fund is “a new institution--we’re not sure it could happen,” said Gramlich, director of the University of Michigan Institute of Public Policy.
Carolyn L. Weaver, a council member and director of Social Security and pension studies at the American Enterprise Institute, doubted whether Congress could resist injecting political considerations into investment decisions.
“They may want to pull out tobacco companies” from the portfolio, she said, “or companies with unfair labor policies, or companies that they think damage the environment.” Legislators might insist that companies with desirable employment policies be added to the investment package, she said.
Robert Ball, a former Social Security commissioner and the author of the government investment proposal, argued that investment choices could be insulated from politics, saying, “Social Security is so important to every family” that any attempt to interfere with the investments would draw a storm of criticism.
Under Gramlich’s leadership, the council, chosen every four years, has gone beyond its basic mission of keeping Social Security solvent for the 76 million members of the baby boom generation, who can begin drawing benefits after 2008.
Without a big boost in revenue, the current system will be much less attractive for younger workers. For example, a married couple born in 1970 will get retirement benefits just 10% more than the taxes they pay. In sharp contrast, a couple born in 1930 and retiring last year will live long enough to reap benefit checks 85% greater than the money they paid into the system because taxes were low during many of their working years.
The council members all agreed that the system needs a big boost in revenue to ensure a strong future benefit structure. But they were deeply divided on the best way to get that money.
Ball’s proposal--one of three competing approaches--would maintain the current system of payroll tax withholding, which takes 12.4% of the first $62,700 in salaries, but have the government invest 40% of the total annual surplus in stocks.
Currently, the money is invested exclusively in Treasury bonds. The rate of return on stock investment after adjusting for inflation is 7%, compared to 2.3% for the Treasury issues, the council was told.
The Social Security system depends on the taxes collected from 125 million workers to pay benefits to 42 million people each month. More is collected than is paid in benefits. Ball would have 40% of the surplus invested annually between 2002 and 2015 in stocks and bonds, reaching $1 trillion by 2015.
Ball voiced satisfaction when Social Security actuaries reported that the plan surpassed the others in the amount of benefits it could provide for most workers.
“Our plan keeps Social Security on a sound basis and outperforms the privatization approach,” he said. His approach has six votes on the 13-member council.
“Our concerns are on the political side,” Weaver said.
The pressure on Congress to interfere would be irresistible, she said, if Social Security piled up so much money that it became the biggest single owner of American business.
Weaver and other advocates of privatization agree that stock investment is the way to boost the size of retirement checks. But their approach is to let each individual make the decisions. This proposal has five votes on the council.
The plan would leave intact 7.4% of the current 12.4% payroll tax, enough to generate a basic payment of about $426 a month in current dollars that would be adjusted annually for inflation. The remaining 5% would go into personal savings accounts, with each worker picking the stocks and bonds.
This represents a new level of risk, however, for millions of workers, who may lack experience with investments. While the long-range rate of return may be 7% overall, some people would reap more on their investments, others would take in less, and some could face financial ruin.
“We’ve never had a situation where the entire population had [the job of choosing stocks] dumped in their laps,” said Gerald Shea, an advisory council member and executive assistant to the secretary-treasurer of the AFL-CIO.
This privatization approach, however, would require raising $1 trillion through an additional payroll tax or a special sales tax. The money is needed because, unlike under the government-investor option, this plan would remove the invested money entirely from government control, and it would not be available to pay current retirees.
The third plan is a proposal by Gramlich to keep the current system and add a new personal retirement account, equal to 1.6% of the worker’s salary. The maximum contribution would be $1,003 a year if such a plan were in effect today.
The money would be invested by the worker, but funds could go only into a series of investment choices approved by the government, such as indexed stock and bond funds that reflected the overall market. Gramlich’s plan has two votes.
