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Senators, experts debate Social Security
Everyone agrees solvency measures need to be taken, but views on accounts remain divergent.
April 26, 2005: 4:49 PM EDT
By Jeanne Sahadi, CNN/Money senior writer
Social Security »»

NEW YORK (CNN/Money) More than partisan bickering, genuine intellectual disagreement was in evidence at the Senate Finance Committee hearing on Social Security Tuesday.

The Finance Committee made up of 11 Republicans and 9 Democrats spoke with five Social Security experts, several of whom have made proposals to achieve "sustainable" solvency in Social Security with and without individual investment accounts.

The heaviest emphasis, however, was on accounts. Here are just a few of the issues that were debated:

Will accounts make the solvency medicine go down?

Everyone speaking at the hearing acknowledged that measures would need to be taken to make the system solvent. Those measures would be completely apart from the question of individual accounts, since accounts do not resolve the solvency issue but rather would increase government borrowing in the near term.

"We've been talking a lot about the desserts private accounts. But not the spinach," said panelist Robert Pozen, chairman of MFS Investments and a Democrat who served on the President's Commission to Strengthen Social Security.

Pozen, whose proposal has gotten a lot of mention from the president and White House officials, has suggested a switch to progressive indexing as the spinach.

Under Pozen's plan, the starting benefits of lower income workers would continue to be indexed to wage growth as they are now for everyone. But the starting benefits of high-income workers would be indexed to price growth. Since prices tend to grow more slowly than wages, that means they would see a reduction in benefit growth.

For middle-income workers, a combination of both indexes would be used.

"We need to treat lower income workers a little better in Social Security," Pozen said, acknowledging that families making $25,000 or less, unlike higher earners, would have a hard time taking advantage of 401(k)s and IRAs to save for retirement.

Critics of his plan say, correctly, that progressive indexing would ultimately lead to everyone getting the same benefit, regardless of how much they paid in. That's why, Pozen said, he suggests stopping progressive indexing in 2079, if not sooner. But lawmakers would need to implement another solvency measure such as raising payroll taxes or changing the retirement age to compensate.

To make the deal more palatable to higher income earners, Pozen proposed adding voluntary individual accounts as a "sweetener."

In exchange for contributions to those accounts, a worker would accept a lower traditional Social Security benefit.

In Pozen's view, the worker would get a higher return on his money in the market than if he stuck with the traditional system, based on the historical returns of a balanced portfolio of 60 percent stocks and 40 percent bonds.

Peter Orszag, an economist at the Brookings Institution isn't so sure. "It's a sweetener only if helps the medicine go down," he said.

He doesn't believe it will, in part because of the offset formula that would determine how much lower a worker's traditional Social Security benefit would be if he opted to have an account. Orszag's example: You put $1 in payroll taxes into your account and in retirement you pay the government back $1 plus interest, whether or not your investments have done well.

Better returns or not?

Senator Max Baucus (D-Montana), the ranking Democrat on the finance committee who is opposed to accounts, took issue with Pozen's assumptions about stock returns.

For a worker to break even if he opens an account and has his starting benefits indexed to prices, stocks would need to return 10.9 percent a year, Baucus said.

That's far higher than the stock-return forecasts of economists, analysts and actuaries, he noted, which range from 6 percent from the Congressional Budget Office to 9.5 percent from the Social Security actuaries.

Senator Jeff Bingaman (D-NM) also questioned Pozen's assumptions, noting that if the Social Security actuaries are correct in their modest assumptions for economic growth going forward, that might place downward pressure on stock returns. The Social Security actuaries have predicted an annual growth rate of 1.9 percent, far below the 3.4 percent growth rate in the economy over the past few decades.

Peter Ferrara, a senior fellow with the Institute for Policy Innovation and a longtime advocate of accounts, expressed high confidence in the ability of the stock market to offer better returns over the long haul than Social Security.

Ferrara's plan to allow workers to contribute 10 percent of the first $10,000 in earnings and up to 5 percent on the rest of one's earnings is the basis for a bill put forth by Sen. John Sununu (R-NH) and Rep. Paul Ryan (R-Wis.). Under that bill, workers with accounts would get the guaranteed minimum benefit equal to Social Security promises under current law if their account investments don't do well.

But critics, such as the Center on Budget and Policy Priorities, charge that the Ferrara plan would require the Treasury to borrow $2.4 trillion over the first 10 years alone.  Top of page


Social Security
United States Senate
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