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Home » Federal Triangle
Commentary/Columns

Federal Triangle

May 1, 2000
Barry Ashby
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Let Us Muddle Through on Our Own

An issue in heated discussion these days is the Personal Social Security Account (PSSA) whereby workers may invest a part of withheld tax in self directed, privately owned retirement plans. Regarding PSSAs, presumptive Democrat Presidential nominee Gore says "No Way" and his boss said "Only government owned investments in market securities are an option," both thereby reflecting their distain of all U.S. citizens' ability to manage their own financial affairs. These two are control freaks of their political party, one which ignores the overwhelming majority of the population in all age groups who recognize a need to change social security to prevent its collapse.

In March 1999, the Senate passed by 99-0 vote a resolution opposing any government-directed investment of Social Security funds. Unfortunately, these top two incumbent pols have opponents who trumpet another siren song for dummies, the Archer-Shaw proposal that privatizes profit and socializes risk in a manner reminiscent of the incentive structure that led to the savings and loan collapse which played out a decade ago. Looking at the plan offered by Republican Congressmen Bill Archer and Clay Shaw reveals major problems.

Government analyses acknowledge that social security tax must increase 40% to 80% to pay benefits promised to young workers, three-quarters of whom are smart enough to know this is not feasible. In surveys, they indicate no trust in the existing federal tax scheme, it being nothing more than veiled wealth redistribution. Most government reports also agree that (the sham of) public bond investment has historically provided a 2.3% return versus 7.5% return for private investment in stocks, a three to one ratio that has held steady over the past two centuries. Statistics show that equity returns have averaged 7% since 1802, and showed a high of 12.6% return over a best twenty year period in U.S. history. So the Archer-Shaw proposal is to deposit 2% of the 12.4% SS payroll tax in a worker owned account to achieve three-fold return improvements. So far so good - except for this wild and crazy thought: why not all into private investment? Okay, the 2% proposal is a start; but, the most significant feature of Archer-Shaw is the "100% clawback" requirement whereby worker assets are returned to government upon retirement. Defined benefits would be paid to the worker with the provision that, if PSSA acquired assets exceed those promised by Social Security, the worker can convert the account surplus to an annuity.

While integrating PSSA investments into a defined benefits retirement program operated by government may curtail the need for future tax increases or benefit cuts, it cannot do more than provide an extra benefit or bonus to the recipient since the benefit floor has been established. The Archer-Shaw plan allows selection from at least fifty competing investment options, caps administrative fees at 0.25%, and is made politically palatable by shielding individuals and their benefits from market risk with all downside risks borne by government. So to compete for PSSA accounts that are available, the investment companies are encouraged to offer the best "bonus" environment they can, that is the highest return vehicles they can devise, which are the most risky and volatile vehicles for investment. This creates the condition that economists term a "moral hazard" or "the presence of incentives for individuals to act in ways that incur costs that they do not have to bear."

Archer-Shaw also requires a mixed portfolio balanced 60% in stocks and 40% in bonds as a way to control risk. Wrong. To maximize that "bonus" a PSSA fund manager is encouraged to create a portfolio with 60% dot-com stocks and 40% junk bonds. The Archer-Shaw plan requires some investment in index funds, not a swell criteria when the index is keyed, as many are, to unique sectors such as funeral and burial stocks, cyclical demand product, or precious metals industries, for example. No stability there even if the North Korea Mutual Fund did payoff. This flawed plan also restricts PSSA investments to "pre-approved, low-risk, investment options," a phrase that any thoughtful citizen can interpret as made to order for those control freaks, inevitably a magnet for political pressures that distort capital markets. This Archer-Shaw PSSA plan would head America down that same road we traveled to and through the S&L crisis, one that pushed half of S&Ls to the edge or into insolvency, a plan that institutionalized moral hazard through federal policy.

It is unfortunate that many politicians are actively discussing the Archer-Shaw plan primarily in terms of a 50% or 75% clawback-like cholera is better than bubonic plague. Why not "means test" social security defined benefit payments, drop penalties to discourage older workers from the work force, and encourage savings by more realistic forms of defined contribution plans for retirement. As example, the (IRA) Individual Retirement Account, currently limited to a $2000 annual tax deferred contribution, could be expanded. The Treasury Department does not lose revenues with IRAs because what is lost on the front end is more than recovered in tax when a retiree begins the withdrawl process. Dartmouth economists Brianna Dussealt and Jonathan Skinner estimate that IRA net tax revenues from 1982 to 1997 contributions were between $14 and $54 billion.

A combination of chicanery and stupidity in public officials, especially coupled with their penchant for control, is a terrible burden for the nation. Why can't they go back where they came from and let us all muddle through on our own?

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Barry-ashby

Barry Ashby is a Washington Editor, and can be reached at 202.255.0197 and askbarry@industrialheating.com.

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