President Clinton unveiled his proposal to reform Social Security in his State of the Union address. True to his past political stances, he melded both Democratic and Republican ideas. However, he is poised to take the Social Security program down a path that will forever change the promise first made in 1937 during Roosevelt's New Deal.
As an actuary whose practice focuses on retirement plan design, funding and administration as well as a business owner, I have serious concerns with Clinton's proposal.
It calls for investing up to 15% of the Social Security assets in private equities. Now 100% of the assets are invested in Treasury bills and notes. He believes this would increase the return on assets, reducing the need for future contribution increases. He points out that private and public programs currently invest heavily in equities.
He doesn't address serious potential problems, including higher investment expenses, significantly higher than buying T-bills. Why do you think Wall Street is pushing to get their hands on about $1 trillion?
An "independent" board would be appointed to make investment decisions -- sounds like "big" government. After making an investment, who would vote in corporate proxies? How would they vote?
President Clinton's proposal calls for creation of Universal Savings Accounts, or USA, to provide an avenue to increase savings among the poor while allowing higher paid individuals to direct some of their Social Security taxes. What President Clinton forgets is that Social Security was created as "social insurance" -- giving more to lower paid people and less to higher paid people. It is a safety net providing a base level of income. It was specifically designed to not provide individual accounts with individual equity. It is a prime example of a government transfer. This is another reason why Social Security should not be confused with other private and public pension plans that invest in equities.
Also, don't forget that we as a nation also have an education problem. Do you really want to have workers who didn't graduate from high school making investment decisions? Is it a good use of our overall productivity to educate everyone about how best to assess risks and returns? Do you trust workers to take care of their individual accounts and not squander them? With Social Security, the benefits are paid over a retiree's and their spouse's lifetime -- not available in a lump sum. They can't go to a casino and lose it all at the roulette wheel. None of these extra burdens have been addressed.
Right now, Social Security retirement benefits cost 0.7% to administer, according to the Social Security Administration's 1998 Trustee Report. Guess what it would be under a combined model of individual accounts and basic plan? More. How much more? Well, the average equity mutual fund has an expense ratio of 1.2%, according to Morningstar. That is probably a good starting point. On top of that, employers may also have the burdens of withholding taxes, splitting accounts and communicating with various investment firms. Would employees spend time at home or at the office figuring out which investments to make? Would they research funds on the Internet at work?
Even with my concerns about President Clinton's proposal, I appreciate his desire to fix the long-term funding issue of Social Security. His problem is that he is being influenced by Wall Street and others to radically change the program. It doesn't need that. He should use the pragmatic approaches of changing eligibility, benefit levels and taxes as utilized the last time major Social Security reform was passed. Don't ruin one of the few government programs that actually works.
Daniel P. Cassidy
Argus Consulting Ltd.