July 10, 2005
Sunday

One of the proposed changes to the federal Social Security program would allow workers to invest, in their own personal accounts, a portion of the Social Security taxes they pay.

During a recent visit to the Social Security Administration's regional headquarters in Boston, James B. Lockhart III, 59, the deputy commissioner of Social Security, discussed personal accounts with Providence Journal MoneyLine columnist Neil Downing. Excerpts follow:

Q: Right now, any extra money the government collects in Social Security is invested in a type of U.S. Treasury security. Should the government invest at least a portion of that money elsewhere - in stocks and bonds, for instance - as many state pension funds do?

A: What happens today is, the money is really used elsewhere (by the federal government), and (the Social Security trust fund receives, as IOUs,) these special-purpose bonds. When I go out on town hall (meetings), I get a lot of people saying, "Why don't we keep that money in Social Security, not spend it elsewhere in government?"

And there's really two ways to do that. One is to invest the money outside Treasury bonds, as you suggested, or in some sort of personal account. And there's arguments on both sides (as to) which would be the better of the two.

Some people would suggest that (if) the government starts investing in the stock market, it could lead to some potential conflicts of interest. The government would be a large shareholder in virtually all American companies. That could lead to congressional interference. As an example, if a factory's going to be shut down in a congressman's district, that could be a problem. . . .

Q: You could invest in indexes of (stocks and bonds).

A: Yes, and certainly that's the model people are using for personal accounts. . . .

Q: That's my next question. President Bush has proposed personal accounts. How would that work?

A: The personal accounts the president has suggested are modeled after something that all (federal government) employees are in, or can be in, and it's called the Thrift Savings Plan. And it's very similar to a 401(k), but a very simplified one, and a very inexpensive one. . . .

The idea would be that, in the president's plan (for personal accounts), there would be (an amount equal to) 4 percentage points of the payroll taxes . . . (set aside in) a personal account, if a person volunteered to have it happen.

And if they did volunteer, then they'd have their choice of investments. In the Thrift Savings Plan, there is Treasury Bond fund; an indexed, passive corporate bond fund; an S&P 500 index fund; (an index fund that covers) the rest of the market . . . and an international equity fund, again indexed. . . .

Q: So let's say that the employee grosses $100. That means that $12.40 goes to Social Security tax now. So of that $12.40, under the president's proposal . . . .

A: . . . $4 would go (in to a personal account). So it's about a third, if you will, of the total taxes (that would go into a personal account). . . .

Q: Does the president require that the employee direct the way the money is invested, or does the president favor simply putting the money into some sort of a big pot?

A: One of the things the president favors - and I do, too, as a matter of fact - is something called a lifecyle fund. The Thrift Savings Plan is actually going to add them this summer, for federal employees.

And the idea behind a lifecycle fund is, it automatically reduces your equity exposure as you get older. So that the fund, when you joined at age 20, may be about 85 percent equities (stocks); by the time you get to retirement, it may be about 20 percent equities.

So the idea is to lessen the volatility as you get closer to retirement age, so there's less surprise. And that would probably be the choice if people didn't want to make a choice - sort of the standard option, if you will. . . .

Q: (Diverting Social Security tax to personal accounts) would take money away from Social Security. So it seems to me that proposal might make Social Security's financial condition even worse.

A: Well, the real point is that personal accounts are just part of the solution. There's really three options, and we've already talked about them: raising taxes, slowing the growth of benefits or trying to increase the rate of return.

And the idea certainly would be that you'd have to have two or maybe three of those in any plan. And different plans have different pieces of that.

But certainly the way the president looks at it is, with the progressive indexing, you do slow down the growth of benefits, which then makes the plan more solid. But you also slow down people's benefits. The idea of a personal account would be to help make up the difference. . . .

Q: Some Republican members of Congress have been talking about some sort of compromise that may or may not include personal accounts. . . . What do you think's going to happen? What's your best guess?

A: Well, there's obviously a lot of activity going on. And I think the good news is that the president has really raised this issue, so that the American people do understand that there is a looming problem, and the sooner we fix it, the better off we are. And that message has really gotten across. . . .

What's going to happen in Washington is, the (House) Ways and Means Committee, and the Senate Finance Committee, are in the process of drafting legislation, they're holding hearings. . . .

There's a lot of ideas on the table, and my sense is, to build a consensus, they're going to make some compromises: Maybe the (personal) accounts won't be as big as some people would like. Maybe we'll have to go to some sort of slowing down the growth of benefits, which other people wouldn't like. Maybe even there might have to be a small increase in the tax maximum. I don't know. There's all these ideas on the table, and what Congress is in the process of doing is trying to work out some sort of consensus. . . .

Q: Any one or two points you wished that we had covered today that we didn't?

A: There's a lot of controversy about personal accounts, and my view is that, as part of Social Security reform, it should definitely be looked at.

It does help make up for the slowing down in the growth of benefits that more than likely will have to happen in almost any reform package I've seen. And, if structured properly - with low administrative fees, well-diversified options . . . it could play a significant role in Social Security reform.

And then, the second issue related to them, is, people talk about, well, there is a cost. And yes, there is a cost. But there is a cost to our program today if we don't do anything. If we want to continue to pay benefits, we're going to have to pay $4 trillion today . . . and most personal account plans are in the $1 trillion to $2 trillion area.

So personal accounts, with other fixes, could actually come to a permanent fix of the system - and at much lower cost than our ongoing system.

Q: If you had all of our readers in this room right now, what one or two messages would you like to stress?

A: Well, there's really two key messages, in my mind. First of all, for your older readers - those 55 and older, and all those who are receiving benefits, whether (they're retired), survivors or disabled - their benefits are safe and secure. President Bush has made that very, very clear, and Congress has made it very clear. . . .

Q: What's the second key message?

A: The system really does have to get fixed, for younger generations. and the sooner we do that, the less drastic the changes will be, and we'll have a lot more flexibility in making changes. . . .

What the president has really said is, yes, this is a very, very serious long-term problem. If we fix it now, we can really do something great for the American economy and the American people.

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