The Jim Lehrer News Hour
SOCIAL SECURITY REFORM
December 11, 2001
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?
Social Security solvency and personal accounts
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?
Personal investment accounts
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.
Social Security solvency
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?
More debate needed
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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