President’s Commission 

to Strengthen Social Security

Thursday,

November 29, 20001

Held at the

Omni Shoreham Hotel

Washington, DC

Audio Associates

9537 Elvis Lane

Seabrook, Maryland 20706

301/577-5882
2

PRESIDENT'S COMMISSION TO STRENGTHEN SOCIAL SECURITY 

Commission Members

Chairman, Richard D. Parsons

Co-Chairman, The Honorable Senator Daniel Patrick Moynihan

Samuel Beard

John Cogan, Ph.D.

William E. Frenzel

Estelle James, Ph.D.

Robert L. Johnson

Gwendolyn S. King

Olivia S. Mitchell, Ph.D.

Gerald L. Parsky

Timothy J. Penny

Robert C. Pozen

Mario Rodriguez

Thomas R. Saving, Ph.D.

Fidel A. Vargas

Commission Staff Members

Charles (Chuck) P. Blahous

Jeff Brown

Steve Goss

DFO, Social Security Administration

Mike Anzick
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I N D E X

Page

Overview of Meeting Agenda 4

Review of Options for Achieving Fiscal Sustainability

Presentation, Mr. Blahous 5

Comments by Commissioners

Mr. Beard 79

Mr. Vargas 81

Mr. Johnson 84

Ms. King 84

Mr. Frenzel 85

Mr. Rodriguez 87

Dr. Mitchell 87

Dr. Cogan 88

Mr. Pozen 89

Dr. James 89

Mr. Parsky 90

Mr. Penny 91

Review of Options for Administering and Structuring

Personal Retirement Accounts

General Discussion 93

Presentation, Mr. Blahous 97

Closing Remarks 126

MOTIONS 5, 82*, 119, 130

(*Friendly Amendments) 85-86, 89-91

Keynote: "---" indicates inaudible in the transcript.
4

M O R N I N G S E S S I O N

(10:07 a.m.)

CO-CHAIRMAN MOYNIHAN: The meeting of the President's 

Commission to Strengthen Social Security will come to order. If 

Fidel will just --- here.

DR. MITCHELL: I can't hear you, sir.

CO-CHAIRMAN MOYNIHAN: You don't have to, I'm not 

saying anything.

(Laughter)

CHAIRMAN MOYNIHAN: As is our custom, I have the honor 

to turn the gavel over to our distinguished co-chairman, 

Mr. Richard Parsons. Welcome. 

MR. : Right on time. 

CHAIRMAN PARSONS: Good morning, ladies and gentlemen. 

 We have quite a full agenda today. Those of you who have 

acquainted yourself with it know what I am talking about, so 

other than to extend greetings on behalf of my fellow 

commissioners to all of you in attendance today and to thank you 

for your attendance, I am going to -- oh, okay. Other than, as I 

say, to extend greetings on behalf of all of us on the Commission 

and to handle one small administrative matter, we are going to 

get right into the meat of things. We are going to dispense with 

what we have done in the past, which is give all of the 

commissioners an opportunity to make an opening statement.

The one administrative item is, due to the fact that 
5

several of our members are going to have to absent themselves 

from the afternoon session for personal reasons, it is the 

recommendation of the Chair that we flip the agenda. We 

indicated we might do this in the agenda that was published, but 

I now formally want to flip the agenda and to take up as the 

first order of business the report of the subcommittee on fiscal 

sustainability, and then to deal with administrative matters 

secondly. 

CO-CHAIRMAN MOYNIHAN: I so move. 

DR. MITCHELL: Second.

CHAIRMAN PARSONS: We all come to that without 

objection. We are going to amend the agenda in that way. Again, 

thank you to all in attendance. We appreciate it. As I say, we 

have got a full agenda today. What I am going to do is ask our 

Executive Director, Mr. Chuck Blahous, to take us through the 

thinking of the subcommittee on fiscal affairs -- or fiscal 

sustainability, so that we can have a full discussion of that 

subject. Chuck.

MR. BLAHOUS: Thank you, Mr. Chairman. I would like to 

beg the indulgence of the Commission, by beginning by thanking 

all of you. It has been a pleasure for several months to serve 

all of you. I have been particularly honored in the last few 

weeks. I think you have all conducted yourselves with great 

dedication and great integrity, and done a heck of a lot of work. 

 I haven't had the chance to thank you all as I would like to, 
6

individually. There's just too many of you. So I would like to 

extend that thanks now on behalf of myself and the rest of the 

staff while you are all gathered. 

Let me try to make a brief summary of the work of the 

fiscal subgroup and state up front that there are about to be 

errors in the following presentation. Those errors are mine. I 

again beg the indulgence of the Commission as a whole, and in 

particular the fiscal subgroup, whose work I will probably 

unintentionally misrepresent at various points. I look forward 

to being interrupted and corrected when those points occur. 

Interruptions are good. I can't think of anything more damaging 

to the long-term prospects of Social Security reform than a twohour soliloquy by me, so I look forward to a vigorous exchange 

with the commissioners as we walk through it. 

I thought it would be appropriate to begin with a 

restatement of the principles for reform that have undergirded 

the Commission's work and as outlined in the Executive Order. 

Although they are well-known in many quarters, it is very 

important to emphasize them at all points, because everything 

that this fiscal subgroup has done has been in the service of 

those principles. 

One is that modernization of the Social Security

program must not change Social Security benefits for retirees, 

people in retirement, or people on the verge of retirement. All 

of our work looks at the long-term prospects for the program and 
7

does not make any changes or threaten any benefits for people who 

are now in or near retirement. 

Secondly, the entire Social Security surplus must be 

dedicated to Social Security only. What this means in practice, 

for this Commission, is that all of the money that is collected 

for the Social Security program, be it payroll taxes and benefit 

taxation, is available to us to use to reform and strengthen 

Social Security. 

If we did not create personal accounts, for example, 

and simply continued to use surpluses to issue bonds to the 

Social Security Trust Fund, that would mean that down the line 

the government of course would honor 100 percent of those bonds. 

 The payroll taxes, if we choose to place them in personal 

accounts, can fund Social Security benefits through those 

accounts, but one way or another, we are going to honor the 

commitment of the Federal government to use all of the Social 

Security money for Social Security.

Thirdly, Social Security payroll taxes must not be 

increased. Fourth, the government itself must not invest Social 

Security funds in the stock market. Fifth, modernization must 

preserve Social Security's disability and survivors components. 

And sixth, modernization must include individually controlled, 

voluntary personal retirement accounts which will augment the 

Social Security safety net.

(Overhead) 
8

MR. BLAHOUS: Now, I would like to step back for a bit, 

Mr. Chairman, and give kind of a big picture overview of what the 

fiscal subgroup has been asked to do and the philosophies that it 

has looked at in trying to do it. 

I think it is fair to say that every member of the 

fiscal subgroup has come to the conclusion that personal accounts 

must be a part of any proposal to reform Social Security. I 

think we all recognize that the Congress and the President, after 

a substantial period of debate, a year or more - we don't know 

the right amount of time, they face a wide range of choices to 

bring the Social Security system to fiscal balance. 

This Commission's report can help to educate the 

Congress, the public and other interested observers as to the 

nature of the choices that are faced. We are not the last word 

in how those choices will be made, but we do have an important 

goal in explaining the ramifications of any such choice. What 

the fiscal group has tried to do is to show the ramifications of 

various different ways that this problem could be solved. There 

is a spectrum of different ways the Congress could go. 

We could choose to live entirely within the current 

revenue stream that is dedicated to Social Security and determine 

how we can maximize benefits within that revenue stream. Or, on 

the other extreme, we could choose to try to fulfill, or perhaps 

even exceed, every benefit promise now in the books in the Social 

Security system for both current and future retirees, and commit 
9

ourselves to coming up with the additional revenues to do that. 

There is an infinite range of possibilities within those two 

extremes, but I think it is fair to say that the fiscal subgroup 

has found that no matter where Congress chooses to go, whether 

they go towards one extreme or the other or somewhere in the 

middle, that every projection we have come up with is that 

benefits for individuals will be higher if we create personal 

accounts than if we do not create them. This is an underlying, 

unifying principle behind all of the recommendations that we have 

developed. 

Further, the subcommittee I think informally found 

themselves guided by values and objectives that have been 

implicit in a lot of the work that they have done. For example, 

each of the options that will be presented today will reduce 

poverty among low-income Americans, indeed among all Americans. 

At least one of the options does this by keeping the current 

revenue -- excuse me, the current benefit promises in place and 

exceeding those benefit promises through the personal account 

option. Other options do this by making directed and specific 

changes to the benefit formulas to create more benefits for 

vulnerable populations, whether they are widows, low-income wage 

earners, or other elderly at risk of poverty. So you will see 

throughout the Commission's work this unifying principle 

illustrated as well. 

I think another principle that has undergirded the 
10

fiscal subgroup's work is that the personal accounts should be 

established in a way that helps beneficiaries. It would not do 

us any good to establish personal accounts in a manner such that 

individuals lost benefits if they took the accounts. That would 

not be a very attractive or desirable outcome. So all of the 

options put forward by the fiscal subgroup would seek to 

establish personal accounts in a way that would improve treatment 

for beneficiaries who were given that option. Very specifically, 

there are some things that the fiscal subgroup has looked at to 

improve treatment of specific populations. 

(Overhead)

MR. BLAHOUS: Let me get into women first of all. One 

of the problems we face with elderly poverty among women is that 

women tend to have lower wages throughout their working lifetimes 

relative to men, and consequently, if it is desired to ameliorate 

this difficulty, added progressivity in the basic benefit formula 

and added guaranteed protections against poverty can be added to 

the Social Security system, and are added in several of the 

options before the Commission today. 

Secondly, a great concentration of poverty among the 

elderly is with women who have lost their spouses: widows. The 

Commission's options include several provisions that would 

increase benefits for widows, some by as much as 50 percent. 

Through the personal accounts in particular, additional 

protections can, and I believe "should," quoting the fiscal 
11

subgroup, be offered to divorced women, by establishing a 

property right in the accumulations in personal accounts of a 

married couple, so that there is some right to benefits for a 

woman who is divorced based on the joint earnings of a couple, 

which is not the case for the current system if the marriage 

lasts for less than 10 years. 

(Overhead)

MR. BLAHOUS: In particular, the fiscal subgroup has 

also given careful attention to how to make sure that the system 

works effectively for classes of Americans who are traditionally 

of lesser income. Again, I would reiterate that some of the 

proposals do this by adding protections against poverty in the 

basic benefit formula. Also, the Commission's recommendations 

look very directly at the fact that certain demographic groups 

within American society do not tend to hold as much in the way of 

private financial assets as the American population as a whole. 

All of the options put forward by the fiscal subgroup would give 

opportunities to these demographic groups to accumulate a 

meaningful measure of wealth through the accounts. 

Let me skip over a few pages in the presentation to 

discuss the range of options that faces policy makers in the 

absence of personal accounts. 

(Overhead)

MR. BLAHOUS: In the absence of personal accounts, the 

options aren't very difficult to understand. If we aren't going 
12

to create a funded component within Social Security, then we 

would only be left basically with two options: either cut 

benefits, or raise revenues. In your packet you see some charts 

that show the ramifications of going to either extreme. We could 

either limit ourselves to the benefits that are payable within 

the current system, or we could raise revenues to meet every 

benefit promise made by the current system. But that is the 

range of options in the absence of personal accounts. 

(Overhead)

MR. BLAHOUS: The fiscal subgroup has been charged with 

developing measures and fiscal sustainability for the Social 

Security system and applying them to various options for reform 

that include personal accounts. I would like to make a brief 

review of what those measures are. Some of them were touched on 

at the last meeting. 

The first one, and a very important one, is the goal of 

having positive annual cash flows for the Social Security system 

within the valuation period. We know that within the current 

system under current law, by 2016 the program will enter cash 

deficits; there will not be enough tax revenue coming in to fund 

all the benefits that the system has promised. 

Now, in that scenario, the government would have to 

come up with additional revenue to pay back money owed to the 

Social Security Trust Fund and pay full benefits. I think it is 

fair to say that almost under any scenario conceivable for the 
13

Social Security system, at some point it is going to face a year 

where it faces a cash deficit. That is the nature of having a 

trust fund. It is the nature of the government's obligation to 

meet its Social Security obligations through the Trust Fund when 

the program faces a cash deficit. 

But the question I think that the fiscal subgroup has

looked at is whether that situation is ever turned around. Under 

current law and under the current system, it never would be. The 

cash deficits would start small in 2016, and they would grow 

without bound forever. That is clearly an untenable, 

insupportable situation. 

Given that it is probably inevitable that the system 

will face some cash deficits at some point, one test of a reform 

proposal is whether ultimately the system is in the long-term on 

a track that enables it to have cash surpluses, and that is a 

measure by which each of these reform proposals will be 

evaluated. 

DR. MITCHELL: Quick interruption. Excuse me. By 

emphasizing this cash flow criterion, how does that relate to the 

picture that you just talked about a moment ago? If you could

just illuminate us. 

(Overhead)

MR. BLAHOUS: Sure. If you go to the previous page, if 

you look at the picture on the right, for example, that just 

assumes that we raise taxes to support the Social Security 
14

system, by some measures we would have made the system 

actuarially sound. The surpluses attributed in the past to the 

Social Security Trust Fund and surpluses that it would experience 

over the next couple of decades would in present value terms 

balance the size of the deficits that the system faces in the 

latter portion of the valuation period. 

But you can see in this picture that that does not 

necessarily lead to a sustainable system. You would still have a 

situation where you are having large, short-term deficits 

followed by large -- excuse me, large short-term surpluses 

followed by large out-year deficits, which as I alluded to 

before, would grow without bound. So it is possible to have a 

system that is in one sense solvent but another sense not 

sustainable, because the program has not moved towards cash 

surpluses in its long range projections. 

DR. MITCHELL: So what you mean is the lines would not 

cross in that right-hand graph.

MR. BLAHOUS: That's right.

DR. MITCHELL: Okay.

MR. BLAHOUS: They don't cross. Once the cash deficits 

begin, the lines never come together again under that scenario.

DR. MITCHELL: Thank you.

(Overhead)

MR. BLAHOUS: I just referred to another measure of the 

system's fiscal health, for which we always turn to the gentleman 
15

on my left, Mr. Goss, the Social Security actuary, and he tells

us whether the Social Security system is solvent or not. Under 

current projections, that would be through 2038. What solvency 

measures is whether the revenues that have been committed to the 

Social Security system are sufficient to fund the benefits that 

are promised from it. That is a slightly different question from 

whether the Federal government has a means of generating the 

revenues to pay those benefits, but it does measure within the 

framework of Social Security whether there are sufficient 

revenues committed to the program to fund its benefit promises, 

and under current law that is through 2038. 

Thirdly, one measure studied by the fiscal subgroup is 

to reduce the rate of growth and long-term system costs as a 

percentage of the gross domestic product. This is very important 

if we are to understand the system as being sustainable. If the 

program and its costs are growing faster than the economy that 

must support it, then there is a sense in which it is not 

sustainable. 

I think Dr. Saving has said at one point or another 

that the real trust fund is the American economy, because that is 

where the resources come from to support the Social Security 

system. If that economy is not growing as fast as the system is, 

then we have a problem. So all of the proposals and examples 

that have been looked at by the fiscal subgroup will be evaluated 

according to how big of a dent they make on the currently 
16

unsustainable rate and cost growth relative to the country's 

gross domestic product. 

Fourth is the 75-year actuarial balance of Social 

Security. This is related to the concept I just discussed, the 

system solvency, but this measure is typically in terms of the 

nation's taxable payroll: what is the gap between the system's 

benefit obligations and its revenue commitments throughout the 

next 75 years. Under current law, it is about 1.86 percent of 

the nation's taxable payroll. 

Fifth, another matter of great importance to the fiscal 

subgroup is that the actuarial balance of the Social Security 

system should not be deteriorating at the end of the valuation 

period. This is very important if we are to consider whether the 

system is actually sustainable. 

If you look at any period of time, whether it is 10 

years, 75 years or 100 years, if 1 year after you enact a 

proposal to reform Social Security you find that it is projected 

to be insolvent again, some people would say that we have not 

done our job. 

One way of gauging whether we would have this problem 

is to look at the very end of the valuation period and to see 

whether the actuary's projections are telling us that the Trust 

Fund's balance is going up or going down at the end of that 

valuation period. If it is going down, then we are going to have 

what is called a cliff effect. One year later we are going to 
17

get a projection from the Social Security actuaries telling us 

that the system is out of balance again, which is in fact 

precisely what happened after the 1983 reforms. 

Finally, another important measure of the fiscal 

sustainability of the system is whether or not we have reduced 

the currently unfunded obligations of the program. I think this 

is intended to take kind of a global, perpetual view of Social 

Security. There is an inherent flaw whenever you look at any 

truncated valuation period. There is a truncated time window, 

and if you have taken an action that has a certain effect within 

that time window, or perhaps an opposite effect after that time 

window, you really don't have a sense of whether or not you have 

improved the system's operations as a whole, in a perpetual 

sense. So the fiscal subgroup has placed some importance on 

looking in a global sense at whether the system's overall 

unfunded obligations have been reduced under the various options 

for reform. 

(Overhead)

MR. BLAHOUS: Now let me turn to three different 

methods that the Commission -- the fiscal subgroup has looked at 

to address these various issues. I am going to try to step back 

for a moment and do something I am not terribly good at, which is 

to get out of the weeds of Social Security reform and look at 

things from a very big picture perspective. Each of these three 

approaches, Mr. Chairman, really looks at things from a very 
18

fundamentally different point of view but asks a different 

question. Therefore, it reaches a different answer, and it shows 

a different aspect of the trade-offs that are facing policy 

makers as they deal with Social Security.

The first example would be to simply create a voluntary 

option for individual participants in Social Security to invest a 

portion of their taxable payroll in a personal account. What we 

have shown here for the purposes of illustration is a two-percent 

account, but it doesn't have to be a two-percent account. There 

are proposals on the table that would have bigger accounts or 

accounts that would be progressively funded. You could build 

various means of doing this into this framework and reach 

fiscally very similar results. I don't want to give the 

impression that this two-percent contribution is set in stone as 

the only way of doing it within this framework. You could also 

perhaps supplement the two-percent account with some type of kick 

start contribution to maximize the account gains for younger 

workers. Proposals like that have been put forward, and we can 

discuss them here if you like. 

But the ethic of this particular framework is to simply 

say, if we leave the old system alone and recognize that it still 

has some fiscal challenges that have to be met, and this 

particular framework would not by any stretch solve all of those 

fiscal problems, but simply set up the accounts in a way that 

they would be reasonably attractive to participants so that they 
19

would be likely to increase their benefits if they took the 

accounts, and if participants took the accounts, the system would 

be moved slightly in the direction of fiscal sustainability over 

the long-term. 

The particular example before you shows that if you set 

up this account so that the individual faces an election where, 

in exchange for the opportunity to get benefits from this 

account, they give up a certain fraction of their Social Security 

benefits, which is equal to the contributions to that account 

compounded by an interest rate of three and one-half percent, you 

could construct this in a way so that simultaneously we would 

project that individuals who took the accounts would do better 

than they would under the current system, but the system would be 

moved slightly in the direction of fiscal sustainability as 

individuals took the accounts. 

I don't want to slide past the very fundamental issue 

with this proposal, which is that this framework by no stretch 

would solve all of Social Security's financing problems. There 

would be remaining issues confronting the Congress and policy 

makers if this is all that they chose to do. But, this is one 

step that could be taken to set up personal accounts. 

The second example approached it from a different 

perspective. It says, what, first of all, can we do to get the 

Social Security system back on track and to make it fiscally 

sustainable within the current revenue stream. We are not going 
20

to raise payroll taxes. We are not going to require individuals 

to put more money into the system. But basically, what can we do 

to make the system run as effectively as possible within the 

current revenue stream.

What it does is, it chooses to balance the traditional 

Social Security system via a number of measures, and while doing 

so, targets the resources of the traditional Social Security 

system a bit more directly on low-income individuals. From 

within that framework of a balanced Social Security system, the 

second example would create an option for individuals to invest 

four percent of their payroll taxes in a personal account up to 

an annual maximum of $1,000. That $1,000 figure would be indexed 

for wages after the first year. 

Now, there are a couple ramifications of choosing this 

approach. One is that because the underlying Social Security 

system has been made sustainable, the personal accounts can be 

made more attractive to the individual relative to the first 

option, because there is no fiscal hole there and there is 

therefore less risk to the system, if you do not construct a 

bigger or tougher offset associated with a personal account. 

CHAIRMAN PARSONS: Let me stop you there and just have 

you take us through that more explicitly. In other words, in the 

first example you gave us --

MR. BLAHOUS: Right.

CHAIRMAN PARSONS: -- which we will call plan one, and 
21

I understand all these plans are illustrative of different 

approaches, but in plan one you take a two-percent personal 

account, and it has the advantages of now that's two percent of 

the money you otherwise would put into the payroll taxes that you 

redirect into a personal account, and it has some of the 

advantages of now being yours and investable in higher yielding 

assets. But in exchange for that, you agree to give up three and 

a -- that amount of money compounded by three and a half percent 

interest.

MR. BLAHOUS: That's right.

CHAIRMAN PARSONS: On your ultimate Social Security 

benefits. So you have to put the two back together, and your 

claim was that, as we have modeled it out, nevertheless persons 

who would take the personal accounts would come out better off 

than if they had not. Now we are talking about a four-percent 

account, and you say the offset is less because we don't have to 

fill the hole.

MR. BLAHOUS: That's right. 

CHAIRMAN PARSONS: I just want you to explain the 

sustainability hole, how that is created and how this new plan 

fills it. 

MR. BLAHOUS: Under the second approach, the offset 

associated with the personal account election is two percent, 

interest rate. There is a logic to that figure. Basically, we 

know based on various calculations that have been done that a 
22

typical rate of return that people get on their Social Security 

payroll taxes is two percent. So the ethic of this particular 

option is to say to the individual, a two-percent rate of return 

is basically what the Social Security system can give you. Now, 

if you think you can get better than a two-percent rate of 

return, here is a personal account option that is available to 

you. I have been admonished to clarify it is a two-percent real 

rate of return, in case that is not clear. 

Under the second option, plan two, if the individual 

beats a two-percent rate of return on their personal accounts, 

they are going to get a benefit increase. I think it is fair to 

say that most participants are likely to think that they can get 

higher than a two-percent rate of return. So the personal 

account can be more attractive under this scenario, because it is 

overlaying a balanced system, than it can be under the first 

scenario. 

CHAIRMAN PARSONS: That is what I want you to 

illuminate for us. Why is it three and a half percent interest 

rate in scenario one or plan one, and two percent in plan two? 

There must be something else going on. 

MR. BLAHOUS: Sure. It basically has to do, 

Mr. Chairman, with the underlying finances of the Social Security 

system. In the first plan, you are basically saying to 

participants, you can stay in the old system and we really are 

not going to balance it. So the finances of that system still 
23

have some holes in it, and because those holes are bigger, you 

have to be careful not to dig that hole any deeper by making the 

offset associated with the personal account election too small. 

Under the second example, however, the traditional 

Social Security system is completely balanced. In fact, it is 

going to move towards cash surpluses within the valuation period. 

 So by almost any of the criteria put out by the fiscal subgroup, 

the system as a whole would be put on a sustainable path. So 

because the system's finances are in order, you can make the 

personal accounts more attractive to participants without 

creating an enormous revenue liability to the taxpayer. 

DR. JAMES: Could I ask a follow-up question? As I 

look at these two examples, it seems to me that a major 

difference, and that it is important to bear in mind, is that in 

example one the people who don't take the individual accounts 

remain in jeopardy, because the system is financially unbalanced, 

and in the future something else will have to happen to balance 

that system. On the other hand, in example two, the underlying 

system has been fiscally balanced, so that the people who remain 

in it are in a less risky situation. They then have the option 

of taking individual accounts which will enhance their benefits. 

MR. BLAHOUS: That's right. Perhaps, Mr. Chairman, 

this is what you were getting to as well, is that there is a sort 

of an unresolved question in the first example, which is what has 
24

yet to be done and proposed to bring the traditional system to 

sustainability for people who don't take the accounts. Under the 

second example here, that uncertainty would not exist, because a 

number of measures are spelled out to bring the system toward 

sustainability, even for individuals who do not take the 

accounts.

CHAIRMAN PARSONS: And those are?

MR. BLAHOUS: Well, there is a number of them. The 

biggest one is to move from wage indexing of the initial benefit 

formula to price indexing. This has been something that has been 

opposed by various advisory boards and technical panels of the 

Social Security Administration for a number of decades, and some 

of the commissioners here know better than I do the lengthy 

pedigree that this proposal has. That price indexing would begin 

in the year 2009, in keeping with the charge not to make any 

changes to the current system that would affect anyone near 

retirement. 

Basically, what price indexing does, it says that each 

subsequent cohort of retirees will see benefits that are 

comparable in real terms to the generation before them, the 

preceding cohort. Currently the system is constructed so that 

the benefit levels from year to year grow with national wage 

growth. That, for a variety of reasons, is an unsustainable 

projection, given the demographics that we are facing. 

I want to be clear, though, that that is not the only 
25

change to the benefit formula that exists under this proposal. 

There are a number of directed measures that would be taken under 

this proposal to affirmatively increase benefits for low-income 

individuals. The benefit formula is gradually changed over the 

period through 2018, so that an individual, if they work for 30 

years at the minimum wage, they are guaranteed a benefit level in 

retirement that is 120 percent of the poverty level, which is a 

considerable increase over current law. This proposal also would 

increase benefits for widows to 75 percent of the couple's 

benefit. 

So the price indexing is one mechanism to bring the 

system to balance, but there are a number of elements within this 

proposal to target the current system's resources more 

effectively so that they reach those in need. Should I go to 

example three?

CHAIRMAN PARSONS: ---

DR. COGAN: Mr. Chairman, could I just interject a 

thought here and a little chart? Andrew, could you give me a 

hand to pass out a chart?

(Chart distributed)

DR. COGAN: I wanted to illustrate what Chuck has been 

saying. In the current system, the benefits that have been 

promised to the future retirees are growing in real terms, or the 

purchasing power of benefits that have been promised to retirees 

in the future are increasing. How much are they increasing? 
26

Well, if you take a 45-year-old person today who is going to 

retire in 20 years roughly, the benefits that are promised to 

that individual in real terms, after taking on inflation, are 

about 20 percent higher than the benefits that are paid to a 

similar worker today. 

Take a person who is 35 years old today. When that 

person retires, the benefits that have been promised for that 

person are about 35 to 40 percent higher in real terms than the 

benefits that are promised -- that are being paid to a current 

retiree. 

If you take a person who is just entering the labor 

force today, the benefits, the monthly benefits that are promised 

to that individual are about 60 percent higher in real terms than 

the benefits that are being paid to a retiree today. That is 

what this chart shows. What the chart shows is that the typical 

retiree today gets about $1,000 a month, and what this chart 

shows is for each age group how much the promised benefits rise 

in real terms. 

Congress instituted this policy of increasing real 

benefits over time, to try to maintain a wage replacement rate. 

They put this automatic provision in place about 25 years ago. 

If you look at the Trustees' Reports of the Social Security 

system for the last 25 years, every report except 2 have shown 

that the system is insolvent. So this automatic wage indexed 

system has, as it turns out, because of demographics and other 
27

factors, proven to be for 25 years to be unsustainable. What 

this policy that we have proposed for consideration in this 

option does, is to say let's modify the promises of the system to 

live within our means. Let's get rid of the increases, if you 

will, in the promised benefits that would require us to impose 

taxes in the future on our sons and daughters that we are 

unwilling to impose on ourselves. 

If this policy were put in place, no future retiree 

would get benefits that are in real terms any lower than the 

benefits that are given to today's retirees. So this would 

preserve, if you will, the purchasing power at a minimum of all 

benefits to future retirees. Then in addition, individuals would 

have an option to gain even higher benefits with a personal 

account. 

MR. BLAHOUS: Mr. Chairman, before I go on to the 

particulars of the various proposals and what they achieve, let 

me describe the third plan before the Commission. Again, let me 

try to step back a bit and say that everything that is before the 

Commission is intended to serve an educational role to show the 

ramifications of fundamentally different philosophical approaches 

that one could take.

Under the first option, we asked what could be done if 

we basically do not directly make changes to the traditional 

Social Security but just try to set up personal accounts in a way 

that benefits individuals and indirectly partially benefits the 
28

system finances in the long-term.

Under the second example, we attempt to, as Dr. Cogan 

said, live within our means and maximize the amount of benefits 

that we can pay through the current system without raising taxes, 

without requiring additional contributions from individuals. 

The third example shows another objective that could be 

pursued, and that is to make as a target the full amount of 

present law benefit promises, as distinct from what the current 

system can actually pay, but to try to make that the target to be 

achieved through the personal accounts. I don't think it would 

be any secret to the members of this Commission or anyone else 

who studied this issue to discover that that requires some 

additional revenue to come from somewhere.

In the particular case of this third option, what is 

required is that individuals would be given the opportunity to 

put another one percent of their income into the system, and they 

would have a match made from their payroll taxes by the 

government of 2.5 percent of their payroll to create a 3.5 

percent account. 

Now, in the particular scheme before the Commission, 

this voluntary add-on would be subsidized via various means by

the Federal government in a way that is targeted towards low 

income, so that they don't have to reach into their pockets and 

come up with money that perhaps they cannot afford. So there is 

an incentivized way of generating the one percent add-on for 
29

those who have lesser means. 

Now, like the second option, the third option makes 

some changes to bring the system, the underlying traditional 

Social Security system, to a path of solvency. It makes changes 

in the indexing of the benefit formula, not to go to price 

indexing but to do something that is called life expectancy 

indexing, which is to basically put in a mechanism for 

calculating the benefit formula over time to reflect the 

actuary's projections for expected changes in lengthening 

lifetimes over the 21st century. That results in less cost 

savings than going to price indexing, and other measures are 

needed to balance the traditional system. 

Among the measures in this proposal are measures to 

correct the actuarial incentives for early and late retirement, 

slightly changing the adjustments made for early retirement and 

for late retirement as a means of improving work incentives. 

Because most individuals tend to retire early rather than late, 

that winds up being a net cost saver for the system. Beyond 

that, there are elements of this proposal that would commit 

additional revenue to the Social Security system as a means of 

enabling it to offer higher benefits as a whole, and we can 

discuss those as we move forward. 

Like the second proposal, this proposal would make 

increases in the guaranteed benefits for low-income individuals 

through 2018, so that an individual who works for 30 years at the 
30

minimum wage does not retire into poverty, and like the second 

proposal, it would increase benefits for widows. 

DR. JAMES: Chuck, could I just add a comment. 

DR. MITCHELL: Speak into the mike. 

DR. JAMES: If you are finished with your brief 

description, I just want to pick up on John's earlier point about 

wage replacement. As I see it, the basic philosophy behind 

example three is to try to maintain the wage replacement rate, 

and of course, to do that requires additional revenues. So that 

kind of basic distinction between the approach in two and the 

approach in three, and the additional revenues in -- when I say 

maintain the existing wage replacement rate, I am including the 

benefits that would come from the two parts of Social Security, 

that is from the individual account and from the defined benefit. 

 So some of the additional revenues would go to the individual 

account in the form of the add-on that you mentioned, and some of 

it would go to the traditional DB, and the two together would 

enable the current wage replacement rate to be maintained. 

Similarly, the minimum benefit for the low-wage worker 

would also be able to rise through time with wages -- partially 

with wages, as a result of the additional revenues that have been 

put into the system. 

CHAIRMAN PARSONS: Bob.

MR. POZEN: I would like to make two further points on 

plan three. One is, in terms of the relationship to life 
31

expectancy, I think we all know that the demographics are such 

that people are living longer, which is a very good thing. What 

we have tried to do here is to give people choice. We are not 

saying you have to retire at any different age than you do now. 

We are keeping the normal retirement age the same, but what we 

are saying is, if you choose to retire earlier and you have a 

longer life expectancy, then there will be some adjustment of 

your benefit. So we believe that this is a proposal that is 

consistent with both changes in life expectancy and trying to 

maximize individual choice.

The other thing that I think is relevant here is, as 

Estelle says, we are adding two sources of revenue. One is from 

the, what I would call, incentivized add-on for the personal 

account, plus some amount of dedicated additional revenues. I 

think, Mr. Chairman, you know that there has been some discussion 

about where those additional revenues could come from. There are 

some of us who feel that it should come from an increase in the 

wage base for payroll tax, not an increase in the rate, and it 

might be useful at least to have some discussion on that point. 

CHAIRMAN PARSONS: Let me say first of all, just by way 

of clarification, as various people who participated at the 

subcommittee level in the construction of these options are now 

illuminating further some of the thinking, they are using terms 

like "we," "felt," and "proposed." This is all to be taken in 

the context of that is the thinking behind individual plans that 
32

are being part of this mix. What we are here to do today is to 

discuss them and determine which of the plans or options or 

approaches the Commission as a commission feels should be 

included in its final report.

Secondly, to the point that Bob Pozen has raised, again 

just for purposes of making sure that those members of the public 

who are listening to this discussion understand the issue that is 

being raised, and then we can have some discussion around the 

table about it, in the six criteria or guidelines that were given 

to the Commission by the President at the time of the creation of 

the Commission, one was that we develop plans and proposals and 

approaches, but none of which, however, could increase payroll 

taxes for the purpose of funding Social Security or meeting 

shortfalls, deficits. 

And the question that is raised is whether an increase 

in the wage base, that is to say in the level wages that are 

subject to the current FICA taxes, which is I think $80,400, if 

you increase that wage base to say, I'll pick a number, $86,000, 

are you increasing taxes and therefore on the wrong side of the 

limitation that the President set for us, or is that simply not 

an increase in taxes, just an increase in the taxable wage base? 

There has been a healthy debate within the subcommittee 

of this, and perhaps we should hear from members of the full 

Commission, starting with my co-chair, the distinguished Senator 

Moynihan.
33

CO-CHAIRMAN MOYNIHAN: I thank you, Mr. Chairman. 

Simply to make a point with respect to Dr. Pozen's proposal, this 

I think Steve Goss will agree with, or correct me, that we have 

had a fluctuating ratio in the past 20 years. In 1982 we were at 

90 percent, and it dropped -- not 1982, 1983. And then it 

dropped to about 87. Change in the income structures in the 

country do this. 

But I can speak to -- as someone, just as one member of 

the Finance Committee over 24 years, we never looked upon this as 

a tax. This was an aspect of the way the tax was, 12.4 percent 

or whatever, as it changed over time. But this was one of the 

variations internal to the system which we adjusted as occasion 

arose, but we are now, I do believe we are now down to about 83 

percent -- 84. Well, we were at 90 and we slowly dropped down to 

84. I would offer the thought that this does not change the 

nature of the calculation.

CHAIRMAN PARSONS: Clearly the rationale as you had 

articulated, Senator, is that having the wage base bear the same 

relationship to total wages over time from a policy point of view 

may be a good thing. Having said that, I am going to, in the 

interest of sort of moving the discussion along, suggest that 

this was one, it seems to me, and unless the Commission is of a 

different mind, this was a specific limitation imposed on the 

Commission by the guy who set up the Commission, namely the 

President. Probably, at least in the first instance, the issue 
34

having been raised and the rationale having been articulated for 

making a change here, the next best thing to do is for us in some 

orderly way to check back with the President who set up the 

Commission, find out what he had in mind, then report back and 

complete the discussion from that point of view. So if that is 

acceptable to all --?

(No audible verbal response, but gavel pounded several 

times)

CHAIRMAN PARSONS: Are there other questions or 

comments that people want to make with respect to these options, 

before Chuck takes us through the specifics? Gwendolyn.

MS. KING: Thank you, Mr. Chairman. Following on this 

plan three where the indexing is tracking life expectancy, would 

you, Dr. Pozen or Dr. James or Dr. Blahous, just speak a moment 

about what that means with regard to people whose life expectancy 

has traditionally not even gotten to retirement age, and I speak 

here to a focus on African American males. How does that work? 

Do you discount it so that they start getting benefits at age 50, 

or is there --?

MR. JOHNSON: I vote for that.

MS. KING: Is there some explanation for how that might 

impact people whose life expectancy has traditionally not taken 

them to retirement age?

DR. JAMES: Can I answer that question?

CHAIRMAN PARSONS: Well, it is directed to you and Bob, 
35

so why don't you start off.

DR. JAMES: Let me say that all of current Social 

Security as well as all of these plans face that problem and have 

not been able to find a solution for that problem. 

MS. KING: You have answered my question. I wondered 

if this were any better. I mean, I like it.

MR. POZEN: I think it is better in one respect and 

that is, what we have tried to is by building in this fairly 

large personal account, which for lower income people would be up 

to $1,000, that account will be available to people if they have 

a longer -- excuse me, a shorter longevity than other people.

MS. KING: In other words, it is an account that can be 

passed on to their heirs.

MR. POZEN: Correct. Correct. So I think we have an 

improvement, because at least we now have a significant -- for 

those people under the current system who if, God forbid, they 

died at the age of 45 and would have nothing essentially --

MS. KING: That's right. If they don't have --

MR. POZEN: -- even though they had paid in, say, for 

25 years.

MS. KING: If they don't have children under --

MR. POZEN: Right.

MS. KING: -- the age of 18.

MR. POZEN: Correct. Now we have done two important 

things. One is, we have the personal accounts so they have that 
36

that can be passed on, and I think both proposals do improve the 

survivor benefits. So it's not a perfect solution, but I think 

those are two important steps in the right direction.

MS. KING: Thank you very much.

CHAIRMAN PARSONS: Fidel.

MR. VARGAS: On plan three it says "commits additional 

dedicated revenues to Social Security." Is that where we are 

talking about the idea of increasing the wage base?

(No audible response)

MR. VARGAS: And so I guess my point is, it seems to me 

that you have argued among the fiscal subcommittee whether it is 

a tax increase or not a tax increase, but obviously in this plan 

there is a need for additional revenues.

CHAIRMAN PARSONS: Yes.

MR. VARGAS: So one way to do it is that way. And I 

think -- and my clear understand that you are also saying if 

there is another way that people can figure out to get those 

additional revenues, that that is acceptable as well, as long as 

it meets whatever the need is for the plan.

MR. POZEN: I think if the consultation leads to the 

fact that we can't increase the payroll base, then we would 

accept another alternative source of dedicated revenues.

MR. VARGAS: And frankly, I think it is a healthy 

debate to have, and I am glad that you have had it in the fiscal 

subcommittee, because I think it is a debate that is going to 
37

happen in Congress, and whether we recommend it or not I don't 

think is going to stop that debate from happening, and I also 

think that Chairman Moynihan brings up a good point in that there 

is some underlying justification for looking at where it has been 

traditionally and where it is now. We could kind of argue back

and forth, well, it's really not a tax increase, or yes, it is, 

or no, it's not, but ultimately, I think what you are trying to 

do in plan three is be as -- to pursue fiscal sustainability and 

be very progressive in terms of establishing some substantial 

personal savings accounts. In order to do that, as opposed to 

plan two, you have to figure out another way to get revenues. 

DR. JAMES: Yes.

MR. VARGAS: So I think maybe the solution is, I think 

you are right, to go forward and check back, but at the same 

time, understand that what you are talking about is additional 

revenues, and where that comes from we might not decide here, but 

it is clear that that is something that needs to be included.

MR. POZEN: I think plan three will have dedicated 

additional revenues.

MR. VARGAS: Sure. 

MR. POZEN: We can debate later what the source will 

be.

CHAIRMAN PARSONS: Just to frame it somewhat 

differently, but I think you are right on the point, Fidel, we 

talked at the last meeting about when you have a system that is 
38

in major deficit like it is currently, three and a half trillion 

dollars, if you are moving toward sustainability you have to do 

one of two things. You either have to reduce the outflow on a 

go-forward basis to bring it back into balance, or increase the 

inflow. So this is sort of the anchor of these two points. 

Chuck, did you have a point? We have a few more commissioners 

who have some questions for you, but you were looking --

MR. BLAHOUS: I was going to give a technical answer to 

Fidel's question, but we can --

CHAIRMAN PARSONS: Technical answers only confuse the 

issue. Tim.

(Laughter)

MR. VARGAS: Don't confuse me, Chuck. I think I got it 

now. So you can go ahead.

CHAIRMAN PARSONS: Tim.

MR. PENNY: If we were to move from 84 percent to 90 

percent or to recommend such a move, does that as a dedicated 

source of revenue adequately cover the additional costs that are 

proposed in example three?

MR. BLAHOUS: Well, what we have done is scored example 

three in a method that gets to balance, in order to resolve this 

somewhat vexatious question. We had Steve stay up all night and 

break out the components of it, and when it came to this missing 

piece of it, he was to identify the amount of revenue required on 

an annual basis and separate that out. I have tried to put in 
39

this presentation enough information about how the proposal looks 

with that revenue assumed in there, not from that specific way of 

getting there, but with that revenue assumed in and also without 

it, so that the budgetary ramifications of the third proposal can 

be seen with some ---

DR. JAMES: As indicated --

MR. PENNY: Yes, but we obviously know the cost.

DR. JAMES: Yes.

MR. POZEN: I think the scoring --

MR. PENNY: And we obviously know --

DR. JAMES: It's 86.

MR. PENNY: -- or should know what the incremental 

amount would be of new revenue if we increase the wage base. 

MR. GOSS: If I might just suggest, the additional 

revenue that has been identified here as being required or 

desired for the example three is not as much as you would get 

from what you suggested, pulling the taxable maximum up to a 

level that would capture 90 percent of all earnings ---.

MR. PENNY: It is less than that. 

MR. GOSS: It is less than that.

CHAIRMAN PARSONS: Okay.

DR. JAMES: It is 86 percent. 

MR. BLAHOUS: That is because it is a net figure. If 

you were to increase the cap on taxable wages, it would have an 

effect both on revenue and on expenditures, because you have to 
40

pay benefits on that. So what Steve has done is, he has given 

you the net figure, which is the size of the hole that has to be 

filled in to make the proposal balance. 

MR. POZEN: But the net figure, Tim, that Steve has 

used, and correct me if I am wrong, is the net figure is going 

from 84 to 86.

CHAIRMAN PARSONS: Okay.

DR. JAMES: Eighty-six percent --

CHAIRMAN PARSONS: Time out.

DR. JAMES: -- is the number.

CHAIRMAN PARSONS: Time out. Because once again, those 

of you who have wanted to know what has gone on in the fiscal 

sustainability subcommittee, welcome to my world. 

(Laughter)

CHAIRMAN PARSONS: We quickly get down into the weeds 

and the technicalities. Let's just get this back up to the

level, though, that not only the commissioners but those of you 

in attendance can understand it. The third plan as it is called, 

which envisions, as Fidel has put it, more revenues coming in to 

the system, has an element that can be filled in several ways. 

One of the ways which some members of the Commission would like 

to explore is by increasing the taxable wage base. We are not 

clear as to whether that is in bounds or out of bounds in terms 

of that original guidance we were given, so we are going to go 

back and check on the guidance. If it is out of bounds, we will 
41

find another way of putting those revenues in. We will find 

another source that is in bounds, to put those revenues in so 

that the plan stays intact. Is that fairly stated, Steve -- or 

Chuck and Steve?

MR. BLAHOUS: That's fair. And actually, there's two 

points I would like to make now. I will try to make them by not 

getting down into the weeds too much. 

Stepping back and looking at the big picture again, 

what we have tried to do is show the ramifications of the range 

of options that confront the Congress. Some of the things that 

have been suggested by congressional sponsors' plans and others 

can be sort of molded into these basic frameworks. There are 

ways to change the construction of the personal accounts under 

the first plan so that it is closer in shape to some of the 

things that have been developed on the Hill. With the third 

plan, this also recognizes that some of the proposals that have 

been put forward by congressional sponsors and others do tap some 

general revenues in order to finance the system. 

That brings me to my second point, which is that I 

would hasten to clarify that the general revenues implicit in 

this proposal and the way that Steve scored it to be commensurate 

with the President's principles, that is not in any way a 

function of or correlated with the personal account element of 

this. That is a component of the program to balance the 

traditional Social Security system and bring it to balance, and
42

so it is not a problem that is in any way introduced or created 

by the personal accounts, but rather a means of bringing the 

traditional Social Security system to balance among the range of 

options available. 

CHAIRMAN PARSONS: I think most of the Commissioners 

understand that. All right. Now I think the next part of 

Chuck's presentation is now to go into a little bit more depth on 

each of the three plans. Is that correct?

MR. BLAHOUS: That's right.

CHAIRMAN PARSONS: So that we get to revisit all three 

plans as we get a little bit more texture on them. But does 

anybody have any further comment or question before we get into 

the specifics? Estelle.

DR. JAMES: Yes. I just want to mention one other 

underlying philosophy in example three, which is to remove some 

of the sources of uncertainty in the finances of Social Security. 

 Part of the reason that Social Security is in the financial bind 

that it's in is that things have not turned out the way we might 

have expected 10 years ago or 20 years ago. For example, people 

have been living longer and longer, and, for example, the wage 

base has been shrinking. So many of these changes are designed 

to remove some of these sources of uncertainty from Social 

Security in the future, so that as time moves on and the future 

unfolds and we are faced with surprises, there is an automatic 

adjustment process. If people suddenly start living longer and 
43

longer, the benefits automatically adjust, so Social Security 

doesn't become sustainable, and that is also part of the 

rationale behind the thinking about setting the wage base as a 

proportion of the total wage bill. That is also a reason for the 

incentives to induce people to continue working longer, so if --

the finances of Social Security won't suddenly be thrown off by 

people's decisions to retire earlier and earlier, and then we 

would find ourselves back in this room again 10 or 20 years ago 

because life hasn't unfolded exactly as we expected. We are 

trying to move some automatic stabilizers into the system. 

CHAIRMAN PARSONS: Okay. Now proceed.

MR. BLAHOUS: Yes. I am surprised there wasn't a rush 

toward the exits when you said I was going to go into further 

depth now in the three plans.

CHAIRMAN PARSONS: Well, some people are leaving, 

Chuck.

(Laughter)

MR. BLAHOUS: Just as long as none of the Commission 

leaves, I'm doing all right. Let me just direct the Commission's 

attention to the charts for plan one or example one. 

CHAIRMAN PARSONS: Put us on a page.

MR. BLAHOUS: Page 12. Page 12.

DR. MITCHELL: Can you show the picture you are 

referring to?

MR. BLAHOUS: Yes. I should have had these page 
44

numbers.

(Overhead)

MR. BLAHOUS: Basically under the first example, again, 

this is the option before Congress and other policy makers which 

would leave the current system on its current course, so there 

will be no changes to the current system for people who choose 

not to take the accounts. As you can see on the left, if you 

assume that there is no participation in the accounts, the cost 

and income rate lines look exactly as they do under current law. 

Effectively nothing is changed from a fiscal perspective. 

Now, what the picture on the right shows is that simply 

by virtue of setting up these accounts in a way that is 

structurally relatively sound, you do start to move this system 

slightly in the direction of fiscal sustainability, simply 

because you have created these funded accounts and they are going 

to start financing a portion of Social Security benefits in the 

future. On the right side of that chart you see the extent to 

which the system finances are improved in the out-years of the 

valuation period. 

(Overhead)

MR. BLAHOUS: Turning to the next page, I'll review a 

little bit more explicitly some of the implications of that 

particular policy option. The current system would remain on its 

unsustainable course.

CHAIRMAN PARSONS: I guess the question would be, these 
45

charts have been constructed to capture the traditional 75-year 

measuring period.

MR. BLAHOUS: That's right.

CHAIRMAN PARSONS: And as you indicated, the chart on 

the right that shows that everybody took the personal account 

that is implicit in plan one, there is some improvement in the 

financial soundness and sustainability of the system within that 

75-year period. The question I would have is, do the lines ever, 

as someone put it here, ever cross? In other words, if you stay 

with this long enough, do you ever get to a place of permanent 

sustainability?

MR. BLAHOUS: The answer is no. You have to take 

further actions beyond this. 

CHAIRMAN PARSONS: All right. 

MR. BLAHOUS: Both for 0 percent and 100 percent 

participation in the accounts. 

DR. COGAN: Mr. Chairman, can I ask a question? If I 

look at the chart on the right side of 12 which shows the net 

impact of the policy, one way to think about this transition cost 

is really to think about personal accounts as an investment. So 

you have an investment period and then you have a period later on 

where you recoup that investment. It seems to me that if you 

have a truncated or a 75-year or a 50-year fixed window, then 

what the calculations off of that fixed window of time reflect is 

sort of all of the investment period but only part of the 
46

recoupment period. It would be like evaluating an IRA 

contribution or investment plan by calculating all of the 

contributions as of costs to the individual because they are 

foregoing consumption, but then only calculating as a benefit the 

first 2 or 3 years of the returns on those IRAs and then 

truncating them. So it does seem to me that we need to think 

about this measure of solvency that we use in this investment 

world that we would be in with a personal account proposal.

MR. BLAHOUS: Well, I think those realities are in many 

ways reflected by the fiscal subgroup's commitment to using 

measures beyond simple 75-year solvency or actuarial balance in 

order to measure the fiscal health of the program. There will be 

inherent limitations and flaws with any time-limited look at the 

system, and that is one reason why it is particularly important 

to look at whether on the long-term basis you have made progress 

towards long-term sustainability, whether in an absolute sense 

you have reduced the system's unfunded obligations. And even 

though there is, you could say, dubious progress within the 

valuation period under an option like this, over the long range 

you clearly are moving in the direction of fiscal sustainability 

by many of the measures that are important to the fiscal subgroup 

and which I assume are appointed to the Commission as a whole. 

Let me just go back to the ramifications page. Some of 

them I have touched on already, but under this plan, 

Mr. Chairman, as you asked, there would be additional actions 
47

required to bring the system towards true sustainability. 

One other ramification of this option I alluded to at 

the beginning of the presentation, which is that the individual 

participants in personal accounts can expect to see gains from 

participating in the accounts, but these gains are much more 

modest under this scenario than they would be under both of the 

other two plans put forward by the Commission, largely because of 

the improved finances of the traditional Social Security system 

for the other two options. It is harder to construct a personal 

account option so that it is attractive to individuals as long as 

the current system remains out of balance. 

Now, we have made it attractive by design under this 

scenario and under our projections individuals' benefits will 

increase, but the amount of the gains from the accounts is 

smaller than it is in the other two options, and that will 

undoubtedly have an impact on individual decision making on 

whether to participate in these accounts.

Finally, I would just reiterate that this is a 

framework. There is nothing set in stone or sacred about this 

two percent illustration that we have put forward. There are 

proposals in the Congress, for example, to say do something like 

this but make the accounts bigger, or make them bigger 

particularly in the case of low-income people, or make them 

bigger still and require individuals to invest a part of their 

account in Federal securities. There are different ways to 
48

structure these accounts, and you can put within this framework 

some of the ideas and some of the very interesting conceptions 

that members of Congress have put together, and fit it within 

those frameworks. 

Another possibility is you could create kind of a kick 

start or seed money for these accounts for younger individuals, 

whether people when they hit age 21 or perhaps even an earlier 

age, to create an initial larger investment in these accounts to 

improve the progress later in the valuation period that this 

advance funding would make. So I would just stress that it is 

very easy to massage and modify this basic framework to be 

consistent with many of the ideas that have been sent to the 

Commission for our consideration.

(Overhead) 

MR. BLAHOUS: On the next page we show benefit 

projections for this example, and these bear out what I said at 

the beginning of the presentation, that this example was 

constructed so that individuals would be likely to see increases 

in total benefits if they took the accounts. 

Now, what we have done here for your edification is to 

show on two of the lines the uncertainty that resides under the 

current Social Security system. The middle line on these charts 

shows the current system's promises, and the dotted line shows 

what it can effectively pay under its current legal limitations. 

 Because those uncertainties remain under this system, you would 
49

certainly have to treat the overall benefit projections as having 

that inherent uncertainty residing in them. But, within that 

basic point, you can see that relative to what is currently 

scheduled, we would project that individuals who took this 

account would get higher benefits than they would by remaining in 

the current system, subject of course to the limitation that the 

current system's benefit promises are likely to have to be 

renegotiated at some point in the future. 

(Overhead)

MR. BLAHOUS: Let me briefly review how this option 

stacks up by measures of fiscal sustainability. In terms of its 

impact on the long-term cash operations of the system, as was 

asked earlier, the cost and income rate lines never cross again. 

 This plan does not get you there. It leaves some of those 

problems for another day. However, as we have constructed it, 

the cash deficits in the out-years under this proposal would 

still be reduced by 37 percent relative to current law, late in 

the valuation period. When you consider that we have done 

nothing to the system other than establish personal accounts, 

that is a fairly impressive degree of progress relative to the 

current system. 

Now, the solvency and actuarial balance numbers are a 

little bit fuzzier, and this reflects that fact that there is a 

variety of ways that this account could be constructed. It could 

be constructed as a two-percent investment from the current 
50

payroll tax stream, it could be one percent from the payroll tax 

and one percent from general revenues. How we decide to finance 

it doesn't really affect the cash flow picture, but it does 

affect the solvency and actuarial balance picture because it 

affects how much money is attributed to the Social Security Trust 

Fund. Under any scenario on a perpetual basis, the perpetual 

solvency of the system would be improved. Only under some of the 

scenarios would they be improved within the 75-year valuation 

period, and those are outlined here.

Finally, this system would reduce the long-term costs 

of the Social Security system, including, I would hasten to add, 

these charts include the annual investment in personal accounts. 

 So this isn't just a reduction in costs for the traditional 

Social Security system but the new system as a whole. It reduces 

the growth in costs relative to the economy by 30 percent through 

2075. Again, considering that we have done nothing other than 

set up these accounts, that is a fairly impressive rate of 

progress relative to the current system.

I think my previous hope that the Commission wouldn't 

start to leave during the presentation has been partially born 

out. I still have an 85 percent rate I think. 

DR. SAVING: How much do you have to go?

(Laughter)

MR. BLAHOUS: Okay. Let's go to plan two, unless there 

are --
51

MR. : Objections.

MR. BLAHOUS: -- objections or further commentary on 

the first plan. 

DR. COGAN: Chuck, one point. You say here on page 15 

that if you were to structure this personal account as one 

percent from the payroll tax and one percent from general 

revenues that the 75-year actuarial imbalance would be reduced by 

28 percent, and that is true. But we have to be very careful 

here, don't we, because from the Federal government's standpoint, 

you are just taking it out of some other pot of money. So two 

percent out of payroll taxes from the Federal government's 

finances is no different than a one percent out of general 

revenues and a one percent out of payroll taxes. 

MR. BLAHOUS: That is absolutely right, and I would say 

in some respects that is a parable on the limitations of what 

solvency and actuarial balance really tell you. One of the 

things that I did not do in the first item on the cash flow was 

to differentiate between the two-percent investment on payroll 

taxes and the one and one, because if you recognize the reality 

that the government still has to come up with one percent of 

general revenues in either case and come up with it from 

somewhere, it really ought not to be counted as some kind of new 

revenue to the system or revenue that is mitigating a cash flow 

problem. So in the chart on the previous page, the system is not 

given any credit for structuring this with general revenue 
52

diffusions, but that particular construction will change how our 

actuaries score the solvency and actuarial balance of the 

program. 

(Overhead)

MR. BLAHOUS: Moving now to plan two. What these 

charts show on page 16, the chart on the left, I think it is very 

important that people understand what this illustrates. This 

basically illustrates in a certain sense what the world looks 

like without personal accounts in a way, because what we have 

done here is shown the benefits that can be paid exactly under 

the current system unless you begin to raise payroll taxes or 

require additional contributions. 

The chart on the left has an actuarial balance of 

exactly 0.00. It is exactly balanced. So the moral of this 

story I think when you look at the chart on the left, it is not 

that this is something so specific to plan two for those who 

don't take the accounts, but it really is in some ways a measure 

of what the world looks like if we didn't create a personal 

account system. 

What you see on the right is how the system will look 

if we move to a personal account system in combination with a 

balanced Social Security system. As you can see, there is a --

the transition investment that Dr. Cogan referred to is a little 

bit bigger under the current system, but qualitatively it is not 

much bigger than the current system. You can see that you reach 
53

your cash surpluses a little bit sooner and they become a little 

bit bigger than the current system. So even though we have made 

the personal accounts very attractive for the individual under 

this scenario so that they are likely to get considerable 

increases in benefits through the accounts, nonetheless, the 

long-term fiscal health of the Social Security system would be 

simultaneously improved as individuals take the accounts. So 

this is a very I think instructive pair of charts for showing how 

personal accounts can integrate with a valid Social Security 

system and improve treatment of individuals, and help repair the 

system's long-term finances. 

CHAIRMAN PARSONS: Just so we are all clear, this 

example, the chart on the left is the projections, we have our 

standard projection of the existing current costing rate, and 

then the graph or the line underneath that is what would happen 

if we implemented what I will call the price indexing of initial 

benefits and the other changes that were suggested in option two.

MR. BLAHOUS: That's --

CHAIRMAN PARSONS: It would bring the system -- without 

personal accounts.

MR. BLAHOUS: Without personal account.

CHAIRMAN PARSONS: Implementing that package of 

reforms, that, you say, brings the system into actuarial balance 

and puts it on a long-term sustainable basis. And then if you 

overlay the personal accounts element of that, you get the chart 
54

on the right, which further improves the picture.

MR. BLAHOUS: Right, in the long-term.

MR. : Long-term. 

(Overhead)

MR. BLAHOUS: On the next page you can see a comparison 

of projected benefit levels. There's three lines on this chart. 

 One shows you what the current system can pay in a literal sense 

if we don't do anything to the system and then watch benefits be 

cut in 2038. Another line shows basically what the current 

system can pay on a sustainable basis if the particular policy 

choices are made inherent in this plan. I think what you can see 

on these charts is that this particular plan directs more of the 

resources towards low-income individuals. You can see that 

relative to the current system, low-income individuals are for 

the most part well above what the current system can actually 

pay. For those who don't take the accounts, a little bit has 

been taken away from the high earners from the current system. 

But for all participants in accounts, you can see that if they 

take the accounts, their overall benefit levels would be much, 

much higher than if personal accounts were not integrated into 

the system. 

MS. ABNOR: Chuck, can I ask -- Mr. Chairman, can I ask 

a question about this?

CHAIRMAN PARSONS: Please.

MS. ABNOR: If I understand this correctly from Steve 
55

Goss's numbers, with this example, after moving from wage 

indexing to price indexing, we then took a look at the minimum 

wage worker and the low wage worker and what benefits actually --

we looked even at what their current benefits would be without 

any changes, and we decided that in those cases, those benefits 

were too low. Under this example or this plan, we have hiked 

them back up again. 

So an example, a minimum wage worker under the current 

system would receive at retirement $7,344, but under this example 

that benefit would go up to $10,308 - almost an additional $3,000 

a year in increased benefits from what the current system would 

pay for minimum wage, and almost the same increase for low wage 

workers. So the benefits under this example for minimum and low 

wage workers are significantly higher than under the current 

system, and I think that is a really important point going to the 

philosophy of a lot of us, that the most important function of 

the Social Security system is to -- most important function 

really is insurance against poverty in old age. What we are 

attempting to do is raise even more of our elderly out of poverty 

in the future than is already done by the current system or 

projected to do. I think this is maybe the strongest point in 

this sample plan, and I think it is something that needs to be 

highlighted. I think it is really important to look at the 

actual dollars that we are talking about. So, I mean in some, 

$3,000 a year increase from the current level. 
56

MR. BLAHOUS: And it is worth stressing that there are 

increases for low-income earners --

MS. ABNOR: Thank you.

MR. BLAHOUS: -- relative to the current system, 

whether or not they take the account.

MS. ABNOR: Thank you. Yes. 

MR. BLAHOUS: That ---.

MS. ABNOR: Without even adding on the personal account 

on top of it, which they would be able to do.

CHAIRMAN PARSONS: Tim.

MR. PENNY: Mr. Chairman, if I can tag on to that 

comment. You have a really good page that summarizes the various 

ways in which we can look at sustainability, and I think that is 

great. We ought to keep that, and in the final report we need to 

do as you have done here and illuminate how each of these 

examples or options or plans measures up against those criteria. 

 But I think what Lee is getting at is there are some other 

important criteria that don't relate specifically to 

sustainability but relate to benefit levels for different 

categories, and that would be the lowest income workers, that 

would be surviving spouses, women who have been through divorce. 

 There are changes within each of these plans that lead to 

different outcomes for those categories, and in many cases much 

better benefits than current law or promised law or certainly 

payable benefits under current law, and I think those also need 
57

to be highlighted more than you have done so in this report.

MR. BLAHOUS: I would stress a couple of things. One 

is that if the -- in the design of this plan, the Commission 

could have chosen to have a rate of benefit growth that would 

have just simply balanced the system as a whole exactly. It just 

so happens that if you were to go to complete price indexing, you 

would save a little bit more money than you actually needed to to 

balance the system. Instead of simply having an overall rate of 

growth that was higher than that, higher than inflation for 

everyone including higher wage earners, both in this plan and in 

the other plan, the fiscal subgroup basically sat down and said 

how do we target the resources of this system so that it most 

effectively reaches those who need these benefits --

MS. ABNOR: Right.

MR. BLAHOUS: -- to keep them out of poverty. These 

provisions to increase the widows' benefit, to increase the 

guaranteed minimum benefit for people as a function of their work 

history, these all are in these plans as a result of that. 

CHAIRMAN PARSONS: Gerry and then Tom.

MR. PARSKY: I will have some comments at the end, but 

I just want to make sure I understand the comparative tables. 

This example two table that you are talking about now, initial 

benefit at 65, I think I understand the relationship between the 

red line and the blue line. Right?

(Background conversation)
58

MR. BLAHOUS: My copy is in black and white. 

MS. : We just have black and white, Gerry. 

MR. PARSKY: Black and white?

CHAIRMAN PARSONS: You got the one original. 

MR. PARSKY: Okay. I think I understand the 

relationship between the present law benefit payable and the 

benefit that is without the account. There is a spread there. 

Okay. Is that right?

MR. BLAHOUS: That's right. 

MR. PARSKY: There is a spread, suggesting that you 

don't deliver under this the same level of benefits that is 

payable under the current system. Is that correct?

MR. BLAHOUS: Under -- I'm sorry. You are comparing 

the benefits --

MR. PARSKY: I am just looking at the average earner, 

just for example.

MR. BLAHOUS: Oh, the average earner. That's right, 

because more of that money has been given to the low-income 

people. 

MR. PARSKY: The low income. That I understand. Now 

if you just flip back to the same example -- I mean the same page 

but under example one. Since I have the benefit of colors I 

won't do that, but the relationship between present law payable 

and the benefit, I gather it is the benefit without the account. 

Are you saying under example one that the -- what will be 
59

provided would be greater than what is currently payable?

MR. BLAHOUS: Not really, Mr. Parsky, because example 

one acknowledges that future actions have to be taken to balance 

the system.

MR. PARSKY: Okay.

MR. BLAHOUS: And we don't know what they are going to 

be under option one, because we are not outlining what they are 

going to be. They are basically left for another day, another 

time. If under option one you visualize a particular means of 

balancing the system, you might well come up with something that 

looks like the benefit line that you see in example two. 

MR. PARSKY: I see.

MR. BLAHOUS: But not knowing what that is, under 

option one what we do is we show the benefits promised and then 

what would happen in 2038 without reform. And then under example 

two we show a particular way of getting to a level of sustainable 

benefits in the old system that the fiscal subgroup thought was 

an effective way of targeting benefits for those who most needed 

it. 

MR. PARSKY: Well, I think that we ought to consider --

I would certainly be very supportive of having this example as 

part of our presentation. I think it is very important. But I 

would think that we would want to make it very clear that the 

only way to achieve this line that you are talking about is by 

making significant additional changes at some point in time, 
60

because if you just look at these two together --

MR. BLAHOUS: Sure.

MR. PARSKY: -- I think it is a little bit distorted.

CHAIRMAN PARSONS: Tom and then Olivia. Tom.

DR. MITCHELL: I just wanted to elaborate on (away from 

microphone)---. 

CHAIRMAN PARSONS: No.

DR. MITCHELL: Sorry. Thanks. I would just propose 

that you get rid of the line for benefit without account, because 

if you haven't specified what you are going to do to make it be 

there, then I just think you ought to get rid of it. Thank you.

MR. : For example one.

MS. : One. 

DR. MITCHELL: In one. In one.

MR. BLAHOUS: Yes. 

DR. SAVING: I think a point that we ought to make 

clear here is that at least plans two and three that we're 

discussing, plan three we still haven't discussed in detail, we 

made very conservative investment assumptions, return assumptions 

on investment, and we made very conservative annuitization rates. 

 If we were to make more -- and rely a little bit on equity 

markets, still in a very conservative way, and a little bit more 

on equity markets in the annuitization phase, we can make these 

benefits of people with the accounts significantly greater than 

what is currently promised. And what is currently promised to a 
61

new person entering the labor force is a 50 percent increase in 

real benefits when they retire. We can do even better than that 

with still fairly conservative investment assumptions. We have 

made even more conservative investment assumptions than that, and 

I think that's important, and we have been able to accomplish in 

both of those plans a very significant -- an even bigger increase 

for lower income people than the currently promised law. So we 

have been able to accomplish a lot. 

MR. : That is a very important point. 

CHAIRMAN PARSONS: Okay. John and then --. John.

DR. COGAN: I want to echo what Tim said and what Lee 

said about changing or adding to the criteria for evaluating 

these plans. I will give an example of just how powerful this 

option two is for low-income people. If you take a person who is 

25 years old today and you give them a personal account with 

these conservative assumptions, the purchasing power of benefits 

for that low-income person, a person who has an average income of 

about $15,000, the purchasing power of the retirement benefits 

for that person will be the same as the purchasing power of 

benefits that are provided to a medium-income worker today. The 

average benefit to a worker today is around $1,000 a month. A 

low-income worker under this plan that chooses personal accounts 

who is 25 years old today and has a chance for the accounts to 

grow, will get a benefit in real terms that is the same as this 

middle class worker, even though their average income is around 
62

$15,000. So that kind of example I think very well illustrates 

the power of personal accounts and the power of this proposal. I 

think when you start asking people to evaluate proposals, I think 

it is very important to have a criterion that reflects that fact.

CHAIRMAN PARSONS: Bob.

MR. POZEN: I just want to confirm with Steve that the 

conservative equity -- excuse me, the conservative investment 

assumption was a 50/50 portfolio, bonds and equity with 

roughly -- Chuck, am I right, with roughly a return of about 4.6 

percent real, 4.7 percent real?

MR. GOSS: Yes. The sort of average portfolio was 

assumed to be 50 percent equity, 30 percent corporate bond, 20 

percent government bond, with an overall net yield of about 4.6 

percent real. 

DR. COGAN: 4.6 percent.

MR. GOSS: 4.6 percent real. That's net ---.

DR. COGAN: I just think it was useful for the public 

to realize that we were talking about a 4.6 percent annual real 

return.

MR. GOSS: Net of administrative cost.

DR. COGAN: Net of administrative cost.

MR. PARSKY: And just to follow on that, what we heard 

from the Thrift Plan that now exists is what would be -- what was 

the average -- or what was the mix in the plan that currently 

exists?
63

CO-CHAIRMAN MOYNIHAN: (Away from microphone) You mean 

the mix of stocks --

MR. PARSKY: Of stocks and bonds in there.

CO-CHAIRMAN MOYNIHAN: Well, they have about seven 

plans now.

MR. PARSKY: But I -- is that --

CO-CHAIRMAN MOYNIHAN: ---

MR. BLAHOUS: Steve tells me it's, as of this moment it 

is closer to a 60/40 mix overall.

MR. PARSKY: That was my point. I think Tom has made

an excellent point here, and I do think that it is important to 

lay out exactly the kind of assumptions that are used relating to 

these personal accounts, the mix, the return, and in relationship 

to what you might determine to be comparable areas. 

CHAIRMAN PARSONS: Olivia, and then we are going to 

move to plan three. Just so that we are all -- we have a 

framework with which to work, I am hoping to conclude the morning 

by about 12:15, which is about 45 -- 40 minutes from now. We 

will then take a 1-hour lunch break. Senator Moynihan and I, 

just so that everybody knows, will probably do an informal press 

briefing at 12:45, and we will reconvene here at 1:15 and 

probably run to 3:00. So we all have a sense of time. Olivia.

DR. MITCHELL: I just wanted to extend what Gerry said, 

that in all of the plans, examples, options and so forth we have 

been looking at, we have been very consistent to always use the 
64

same assumptions across plans, so that nobody gets brownie points 

for deviating in an alternative direction. We have been I think 

very careful to compare apples and apples, and I would say that 

after our Commission's work is over and as other people take 

these discussions to Capitol Hill and the rest of the country, it 

is going to be very important to score these using a common set 

of benchmarks, or otherwise I think people will be very confused 

about where we are going.

CHAIRMAN PARSONS: Fair enough. 

MR. BLAHOUS: Mr. Chairman, before I go to the last 

one, just a brief summary on the fiscal characteristics of the 

second plan --

CHAIRMAN PARSONS: Sure.

MR. BLAHOUS: -- I think are important. One is that 

this is a plan that would get to positive annual cash flows 

within the valuation period and they would be permanent. That is 

very important. I think it is interesting and worthwhile to note 

that if no one took the accounts that would happen by 2062, but 

if everyone did, it would happen by 2057. So in other words, the 

more people take the accounts, and the accounts are designed to 

be attractive, the sooner the system gets to positive, permanent 

cash flows. That is a very important result. 

Solvency and actuarial balance would be improved under 

all participation rates for the accounts. The traditional Social 

Security system for those who don't take the accounts, or if you 
65

assume no one takes the accounts, that would be entirely 

balanced. The amount of revenues required to balance the system 

as a whole would be reduced by approximately 40 percent relative 

to the current system, and then I would -- that is 40 percent 

relative to a 75-year figure then, and that is important to note, 

because under the current system that figure is increasing 

without bound after the 75 years, whereas this plan would reduce 

that by 40 percent and then it would be over. You would be in 

permanent surpluses after that. 

As for reducing the rate of growth and long-term costs 

as a percent of GDP, this program would solve that matter 

entirely. As a matter of fact, the total system costs would be 

lower as a percent of GDP at the end of the valuation period than 

they are today. So that problem would be entirely solved. And 

actuarial balance under all participation rates would be 

improving at the end of the 75-year valuation period. So you can 

see that this program meets a number of tests for fiscal balance, 

plus the progressive and distributive aspects the commissioners 

have outlined. 

(Overhead)

MR. BLAHOUS: Going now to the third system, you see 

here two charts that show --

DR. COGAN: Chuck, can I interrupt you just for one 

second? A question about this third example. You say that it 

has a voluntary contribution. Is it that the contribution, the 
66

individual gets a personal account and then can add their own 

money to it, or is the out-of-pocket money required in order to 

get some access to their payroll taxes?

MR. BLAHOUS: My understanding of the construction of 

it, and commissioners should correct me if I am mistaken, is that 

the one-percent voluntary add-on is a trigger, as it were, for 

the personal account, that the individual chooses to put up one 

percent and then that is effectively matched by the government at 

two and a half percent from payroll taxes. So there is an 

incentive there. You don't get the investment of the payroll 

taxes unless you put the one percent in. 

Now, there are other incentives as well that are put 

forth through the tax credits and other specifications that have 

been put forward, but it is sort of a triggering mechanism for 

the investment of the payroll taxes.

MR. POZEN: I think that is correct, but I think the 

incentive, there are tax incentives provided for people to put up 

the one percent including refundable tax credits for people who 

would not be otherwise paying income tax. 

MR. BLAHOUS: Right. And in the case of low-income 

people, the particular incentive mechanism as I understand it is 

to do it through the year-end income tax credit. 

MR. PARSKY: But just so that I understand it. I think 

this a very important point relating to this plan, plan three or 

example three. It is voluntary but you have pay something in 
67

order to be part of it? Is that what you are saying? 

MR. BLAHOUS: That's correct. 

MR. PARSKY: Oh.

MR. BLAHOUS: It is kind of a --

CHAIRMAN PARSONS: In order to be in the personal 

account side of it. 

MR. BLAHOUS: In order to --

MR. POZEN: I think this is what is traditionally 

called an add-on plan, that you have to add on something --

CHAIRMAN PARSONS: Right.

MR. POZEN: -- in order to get matched by the 

goverment.

CHAIRMAN PARSONS: Right.

MR. PARSKY: Or kind of in short hand, you have to pay 

to play?

MR. : Yes.

CHAIRMAN PARSONS: But going back to again --

MR. POZEN: But you are tax incentivized to play.

CHAIRMAN PARSONS: Our conceptual dichotomy, Gerry.

MR. PARSKY: Okay. I think I -- pardon me?

CHAIRMAN PARSONS: Because the money comes from 

somewhere. Going back to our conceptual way of looking at this, 

this plan assumes more inflow. So part of that inflow comes out 

of an individual's pocket. In other words, you have put up an 

additional one percent to get that match by two and a half 
68

percent of your Social Security money in your personal account, 

and to incentivize somebody to put that money in, various 

features of the plan have been created that make it attractive 

for you do so. But yes, you have to pay to play.

DR. JAMES: The basic idea of this goes back to the 

basic philosophy that it is important to maintain or even exceed 

the current wage replacement rate. In order to do that, you need 

additional revenues. You have to get the additional revenues 

from somewhere. The add-on is one piece of that additional 

revenue. The tax source, whether it is from a stabilization of 

the wage base or from some other source of public money, is 

another piece of that. So that is the general approach in plan 

three. 

MS. KING: May I just ask one question of Estelle, and 

that is, the refundable tax credit part of it is purely for 

incentive? That is to say, if you didn't -- you don't need it in 

order for your -- for the plan to go forward. You're thinking it 

is like a sweetener, like a ---.

DR. JAMES: Well, yes, but especially for low earners. 

 It is going to be difficult for them to come up with the 

additional one percent. I mean, one percent of, say, $10,000 is 

only $100, but that may be a lot of money for that person who is 

only earning $10,000. 

CHAIRMAN PARSONS: Undoubtedly is.

DR. JAMES: The tax credit and the fact that it is 
69

refundable is designed to make it attractive and affordable, even 

for the low earners.

MS. KING: Okay. I just need somebody to correct my 

memory. I remember a number of tax proposals with the term 

"refundable" in them, but it seems to me that they have not 

traditionally been terribly successful in passing. Am I missing 

something here?

MR. PARSKY: They're not.

MR. POZEN: This one already exists. I mean, we are 

building off the one that exists, and it essentially would say if 

you are already eligible --

MS. KING: The earned income tax credit.

MR. POZEN: -- the earned income tax credit. Just to 

give a simple example, if you are already eligible for the earned 

income tax credit and you had to put, as in Estelle's example, 

$10,000 -- you are at $10,000 and you had to put in an extra 

$100, this would give you a refundable tax credit of, say, $50 

toward the $100, so you would get partially subsidized by the 

existing -- in accordance. You wouldn't create a new program; 

you just use the existing program.

MS. KING: I see. Thank you. 

CHAIRMAN PARSONS: John.

DR. COGAN: Now this earned giving of a tax credit is 

for people primarily who don't pay any income taxes.

MS. KING: Exactly.
70

DR. COGAN: And so it seems to me that the proposal as 

it is structured uses somebody else's money for the person's 

personal account. Why wouldn't you modify the proposal, or would 

you think it would be a good idea to modify the proposal, to 

instead say for low-income people, allow them to use an 

additional one percent of the payroll tax, so they are using 

their own money that they pay in taxes creating, thereby, 

ownership? Why have you gone the route of using somebody else's 

money?

DR. JAMES: Well, the basic idea is that we are using 

the tax system, which is a very traditional way in the United 

States to encourage retirement savings. Everyone is expected to 

put up something if they want to play, and this includes low 

earners. But everyone gets some kind of a tax incentive, but low 

earners get it in the form of a refundable tax credit which 

covers part of that add-on, although not all of it. 

MR. POZEN: I think the answer is this, that we 

provided that the match will be 2.5 percent but up to $1,000, 

which gives a larger account for lower-income people, but if we 

had taken out another 1 percent for low-income people, it would 

have hurt these solvency type of --

DR. JAMES: ---

MR. POZEN: -- calculations, and the basic philosophy 

here is that we want to bring new revenue in the system. We want 

to do this change for longevity, but we also want to bring new 
71

revenue in the system, and this was considered to be a modest way 

to bring in -- an incentivized way. If we took out an extra one 

percent, which we could do, it would change all the solvency 

numbers in a negative way.

CHAIRMAN PARSONS: I think, John, the value of this is 

it highlights the public policy issues --

DR. JAMES: Right. That's right.

CHAIRMAN PARSONS: -- that various approaches to 

solving this problem create, and that these are the kinds of 

issues I think the Congress and ultimately the President need to 

wrestle with and grapple with in terms of how do we bring this 

thing back into solvency.

DR. JAMES: Right. 

DR. COGAN: But I think one of the important points is, 

to go back to what I said earlier, that is we shouldn't confine 

ourselves to narrow measures of solvency. A dollar out of the 

Federal Treasury is a dollar out of the Federal Treasury. When 

thinking about solvency issues, it is important to consider the 

Trust Fund but you don't want to make, I won't say, inferior 

policy, but you don't want to be driven too much by this, by 

being tied to the 75-year solvency of the Trust Fund. 

MR. PARSONS: Tim.

DR. JAMES: Could I just mention that in terms of the 

numbers, the earned income tax credit refund, which is what we 

have been discussing here, would cost about a billion dollars a 
72

year. So in the infinite scheme of things, compared with the 

trillions that are under discussion, we are not talking about a 

huge impact on the general budget.

CHAIRMAN PARSONS: A billion here, a billion there. 

MR. : Is that the right number?

MR. PENNY: But we are. But we are talking about an 

impact. 

DR. JAMES: Yes.

MR. PENNY: And whether it's EITC or getting back to 

our earlier discussion about expanding the wage base or just an 

outright general fund --

CHAIRMAN PARSONS: Transfer.

MR. PENNY: -- transfer, somehow in our analysis of the 

fiscal impact of these various examples or options, we need to be 

honest about that, so that we are not comparing apples to 

oranges. So find a way to do that in the way you draft our final 

report, and then we can approve or disapprove of how you 

recommend, but we need to find a way to do that, because it is 

sort of hidden and we are looking at this as if there is solvency 

that's, you know, solvency that isn't quite the same as the 

solvency we have described in the previous option. 

(Background conversation)

MR. PENNY: Because this requires some money to come 

from somewhere, and it is not accounted for in quite the same way 

that we accounted for it in the previous option. 
73

CHAIRMAN PARSONS: Better put, it requires some money 

to come from a bunch of places --

MR. : Yes.

CHAIRMAN PARSONS: -- and we ought to be clear in terms 

of how much actually is coming additional contribution from 

workers, how much is being tax subsidized, how much is coming 

from some other place that shows up on the Federal budget or 

somebody else's budget.

MS. : Right.

CHAIRMAN PARSONS: Just be clear where the money comes 

from. 

MR. BLAHOUS: I also want to be clear on a couple of 

technical points. One is the --

CHAIRMAN PARSONS: Oh, no. Here we go.

(Laughter)

MR. BLAHOUS: Sorry. We are and have been working on 

trying to get a more precise estimate of the size of the EITC 

subsidy. We are working with OMB and the Treasury to do that. 

Secondly, and this I think is responding to Commissioner King's 

question basically about the nature of the one percent add-on, 

again stepping back to the big picture, there is kind of a basic 

ethic, if you will, residing under each of these plans. The way 

that this one percent add-on is structured, there is no offset 

associated with the one percent add-on, and if it were not there, 

the basic systemic finances within the Trust Fund would still be 
74

the same. So where this cost shows up and the reason it is 

present is because the underlying ethic that went into the 

drafting of this option was to hit as a target the current law 

benefit promises, and that is the main function of this one 

percent add-on. It is not so much to interact with the system 

finances, which are basically the same without it because it is 

not offset. So the cost of the EITC subsidy really shows up on 

the Federal government's books as a whole and is sort of inherent 

in the benefit projections for individuals, more than it is with 

the finances of the traditional Social Security system. 

DR. JAMES: Chuck, isn't it true that we are developing 

measures on the unified budget? I think that would address Tim's 

concerns.

MR. BLAHOUS: That would be included.

DR. JAMES: That is one of the indicators that is 

important to look at. That should capture all of these things.

MS. KING: Just so I am clear --

MR. : Speak into the mike.

MS. KING: What I thought I heard you just say, and I 

could be wrong, that using the EITC is in fact tantamount to a 

tax increase, and --

MR. : I don't --

DR. JAMES: No.

MR. BLAHOUS: No.

(Background conversation)
75

CHAIRMAN PARSONS: It is more equivalent to a transfer 

of general revenue. It is more equivalent, conceptually 

equivalent. 

MS. KING: But using the EITC doesn't -- does have a 

sort of reverse impact for where we said we would be going with 

the revenue program aspect. 

CHAIRMAN PARSONS: I don't think so, Gwen. I think 

what -- the way to think about it is, you would give -- some 

people if they chose to put up an additional one percent of the 

their earned income base would get a bigger tax break than they 

currently get. 

MS. KING: Okay.

CHAIRMAN PARSONS: So it is equivalent to at the end of 

the day a general funds transfer, as opposed to a tax increase. 

MR. PARSKY: I think that is a valid point. In order 

to have apples compared to apples, I think if you considered 

doing what John I think was suggesting, which is if you allowed 

this to be an additional amount of payroll taxes but then had to 

identify the amount of general revenue transfer you would have to 

make in order to deal with the sustainability issue, then you 

will have -- there will be some general revenues needed in 

transition for plan two.

CHAIRMAN PARSONS: Yes.

MR. PARSKY: And certainly there will be additional 

revenues needed for plan one, even though it is not quite 
76

identified in terms of how much. So you would then have at least 

the basis for doing an apples-to-apples comparison, it seems to 

me. 

MR. BLAHOUS: That's right. And we have tried within 

the restrictions of a fairly simplified presentation here to show 

these different aspects. It is inherent in the plan to commit 

these revenues, so the initial presentation of the plan shows it 

with these revenues in there, but there are various --- risks and 

qualifications that basically show the net amount of revenues --

net of these revenue commitments, and Steve has also been asked 

at every step of the way to separate out the various components 

so that commissioners can see the revenues committed from 

different sources.

CHAIRMAN PARSONS: Okay. Let me --

DR. JAMES: There is a policy decision about where the 

revenues should come from. We are not going to make that choice. 

 That choice will be made by Congress and by the White House. So 

there is a difference between a plan that visualizes the money 

coming from the payroll tax versus the money coming from the 

general revenues. There are different distributional impacts. 

The money will ultimately come from somewhat different sources, 

so I think it does make a difference how you specify that. At 

the same time, it is important to capture all of these cost 

elements, and that is the reason for including the impact on the 

unified budget. 
77

CHAIRMAN PARSONS: Chuck, let me ask you to take the 

next five minutes to finish the last I think it is two pages of 

this presentation, and then I want to throw it open for some 

general discussion, because I think we need to begin to drive 

this to a point where it will be helpful to the staff in terms of 

next steps. 

MR. BLAHOUS: Okay. Terrific. Let me just summarize 

very briefly the benefit projections for this proposal. As you 

can see, individuals who take the accounts under this proposal 

would vastly exceed what they would expect to get from the Social 

Security system lacking the accounts. The one thing that I would 

point out here is that the underlying ethic, as I said before, of 

this proposal is that if people took the accounts, they would be 

able to reach or exceed what the current system even promises, 

and that is why it has to tap additional revenues to do that. 

Now, the other thing I would point out is that when 

this proposal was first devised we were making some even more 

conservative assumptions on the rates of return. So these 

actually all exceed current law benefit promises by more than 

they did when this proposal was first developed. So even if you 

scale back these projections to an even more conservative rate of 

return, you are still going to be beating what the current system 

promises, just because of the timing of our work and the way we 

did our projections.

(Overhead)
78

MR. BLAHOUS: Finally, on the last page, interestingly, 

this system will return to cash balances in the out-years if 

everyone participates in the accounts, and there is ample 

incentives for them to do so, especially because the two-percent 

offset is only applied to a portion of the total of account 

investments, and so individuals are likely to come out, as you 

saw before, very far ahead, and if they do, the system will reach 

permanent annual cash balances in 2062. 

Under all participation rates for the accounts, the 

solvency and actuarial balance picture would be improved about 50 

percent of -- 54 percent of the current gap would be filled in 

terms of the revenue commitments remaining yet to be devoted to 

the system to bring it to solvency. What I have done in the 

double asterisk below is to net out some of the other revenues 

for those commissioners who wanted to look at the proposal 

without the credits for the transfers of those revenues. 

Like the previous proposal, the total system's costs 

would not be growing faster than the gross domestic product by 

the end of the valuation period. That problem would be wholly 

solved, and the system would be absolutely sustainable as a 

function of the growth of the American economy. And like the 

previous proposal, the actuarial balance of the system as a whole 

would be improving and not deteriorating at the end of the 

valuation period. 

So those in sum, Mr. Chairman, are three different 
79

examples that are before the Commission for their consideration. 

 They each serve different philosophical approaches to attaining 

fiscal balance within Social Security, and they each show how 

personal accounts can benefit beneficiaries as well as the system 

as a whole. 

MR. POZEN: Could I just add one --. Again, this point 

on the low earners, if you look at example three, initial benefit 

at age 65, from 2036 on the benefit of low earners is very much 

higher than you would have under the current system, and unlike 

plan two, that continues - and continues essentially forever. In 

plan two they come back together, but because of the wage 

replacement feature of the way we have structured this, low 

earners continue to have a substantial benefit on the DB only, 

just assuming they don't even take the personal account. They 

are going to have a lower benefit essentially throughout this 

whole period. So I think this is a very important feature of the 

plan. 

CHAIRMAN PARSONS: Okay. Let's have a period of 

general comment on these three plans, and then hopefully, what I 

would like to do is in the next 15 minutes drive it to a point 

where we could be at a point where we give staff guidance in 

terms of whether we want to now construct this sustainability 

part of our report around these three options or we don't like 

these options, we want to modify them. Sam, kick us off. 

MR. BEARD: I would like to, Mr. Chairman, make a 
80

totally nontechnical comment. 

CHAIRMAN PARSONS: It would be welcome.

MR. BEARD: I have had the privilege of participating 

in this whole process over the six months, and I just want to 

give an overview. What's going on today from my vantage point is 

very exciting. What we are saying is, Social Security as it is 

is in serious imbalance. We have done the work. We have put 

together three alternative plans. It is very important that in 

the three alternative plans there are some tough choices. If 

there is a serious imbalance, tough choices need to be made. 

What is exciting here is that the -- when I go back to 

1998, President Clinton pulled us all to the White House and 

said, "For the good of the country we have to change Social 

Security. Don't get tied up in any position you are in, because 

we are going to have to do something significant." It is very 

exciting that President Bush has picked up that and he is saying 

on a nonpartisan basis with the Congress, let's get going here. 

It is essential for the good of the country. 

What we are putting together here is three plans, and 

the message really is it is exciting. In a short period of time, 

one, two years, we need to address this on a nonpartisan basis, 

and basically, anybody could take parts of any one of these plans 

and carp at them, they can demagogue at them, but there is an 

exciting message here. The vision part: let's put wealth on the 

table for all Americans, let's save Social Security, save the 
81

social component part. So basically, part of the message is, 

everybody get serious. If you don't like what we are doing, no 

plan, no play. You have got to come up with something which 

reflects the degree and depth of the work that has gone in here, 

or else it is not responsible dialogue. 

MR. : It is taking a life of its own.

CHAIRMAN PARSONS: Yes. Fidel. 

MR. VARGAS: You said 15 minutes, but -- and maybe 

sooner, at least I hope, because one of the things that I got 

from this discussion was, number one, I want to thank the fiscal 

subcommittee and staff for doing the work, because I think you 

did capture kind of the range of options. What I see it really 

is is as a continuum. You have three plans that are presented 

before us today, but really there is a fourth, and that fourth is 

the "do nothing plan" which you talked about, which is obviously 

that there is no one that can argue everything is sustainable for 

the long-term. Yes, current and near retirees are going to be 

taken care of, and we --- right away to take care of them if we 

don't do nothing, but the "do nothing" option means increasing 

taxes or cutting benefits. 

But the three plans that are presented here today, 

again, are along a continuum, from modest I would argue, to more 

progressive, and also progressive in the terms of sustainability. 

 The way to get there is -- there's different paths to get there. 

 Frankly, I think that the fiscal subcommittee did the work that 
82

we were charged to do. 

Now there are details that need to be illuminated in 

each of these plans I think for the final report, but I don't --

I would recommend or I would move that the Commission direct

staff to illuminate some of the potential issues in the plans

that have been addressed today but that to come back with those

three proposals as potential plans or paths to follow as

recommendations to the President in our final report.

CHAIRMAN PARSONS: Is there a second to that motion?

DR. MITCHELL: Second.

CHAIRMAN PARSONS: Now live for discussion. Keep 

going.

MR. VARGAS: Then I will just keep going with that 

discussion.

CHAIRMAN PARSONS: Keep going.

(Laughter)

CHAIRMAN PARSONS: Just being efficient.

MR. VARGAS: As a former Mayor, I am used to moving 

things along in this manner, so I apologize if I seem a little 

too pushy. The things that we talked about in terms of the 

President's directives and then more importantly some of the 

issues that were discussed today. How I am looking at this from 

my perspective, because I actually rank them a little differently 

than were discussed today, but the first which I think is 

important is each of these establishes substantial personal 
83

savings accounts. You can argue again about the size or the 

depth, but essentially we are talking about, as Senator often

says, personal property, accounts that are people -- that people 

can see, that they can touch, that they can feel, that they can 

direct, that they can own, that they can pass on to their heirs, 

and that will make a significant impact regardless of what plan 

they are included on the economic well-being of all Americans, 

especially low-income and low-wage earners.

The second is financial sustainability. Again, you 

could argue that even plan one to some degree addresses it, 

although obviously there are still questions that need to be 

resolved, and that plan three and plan two address it as well but 

in different ways. We are protecting current and near retirees. 

 Nowhere here have we said that we will not continue to honor 

those promises that are made to current and near retirees. That 

was a given, and that's something that we are emphasizing again 

today.

One of the things that was critical for me is we are 

essentially talking about raising the benefit levels, real or not 

real, for low-wage earners in each one of these proposals in 

different ways. That is critical. That to me is critical. A 

fifth is we are protecting survivors. We talked about it again. 

 We have dealt with those issues. And finally, protecting 

minorities and women to some degree. Again, we can argue that we 

could do it better in one plan versus another, but in each one of 
84

these it is addressed in that way. So I think that from my 

perspective the fiscal subcommittee did its work, and again, we 

would just reiterate that we -- and it has been seconded, that we 

direct staff to go ahead and work on the specifics of each of 

those so that when we have a final report that all of those 

issues are illuminated properly.

CHAIRMAN PARSONS: Further discussion on the motion? 

Bob.

MR. JOHNSON: I just have a question that will relate 

to something I want to talk about in the administrative portion 

this afternoon, which may if answered correctly permit me from 

being the weakest link in this discussion. Question: assuming 

everyone were to take out that personal retirement portion of 

their Social Security account, only that part, at retirement, 

would that damage or destroy the sustained viability of the 

system? 

MR. BLAHOUS: No, actually.

MR. JOHNSON: Thank you.

(Laughter) 

MS. : Yes or no. That's very good.

CHAIRMAN PARSONS: Gwen.

MS. KING: Mr. Chairman, at our last meeting I 

complained that --

CHAIRMAN PARSONS: I guess Chuck is the weakest link.

(Laughter)
85

MS. KING: At our last meeting I complained that the 

economic group hadn't come forth with plans, and I just want to 

publicly take back that statement. I would eat the piece of 

paper if I still had it. I think you have done a fabulous job. 

I would only add to the motion that I think it would be so 

important as staff begins to take on this assignment that we keep 

in mind the importance of communicating clearly, of trying not to 

lapse into jargon, of writing with a voice that people will 

understand and be very clear, not ambiguous, so that our report 

can get the receptivity that it will and people will understand 

it.

CHAIRMAN PARSONS: Will you accept that as a friendly 

amendment, Mr. Vargas?

(No audible response)

CHAIRMAN PARSONS: Mr. Seconder?

CO-CHAIRMAN MOYNIHAN: Second.

CHAIRMAN PARSONS: Okay. Bill and then Mario. 

MR. FRENZEL: I --

CHAIRMAN PARSONS: Speak into the mike please. Thank 

you.

MR. FRENZEL: I intend to support the amendment. I 

would hope, however, the staff and in fact the members of that 

committee or the members of that subgroup who have performed so 

well might not give up attempts to expand. I think there are 

things that we have all talked about both inside and outside of 
86

that committee, which may well go in here as some options. 

Obviously, we cannot bring in a whole new plan from left field 

and have it actuarially assessed, and I don't mean that, but I 

would like to give the staff a fair amount of scope, 

Mr. Chairman, and I would ask the maker of the amendment if he 

has that in mind. 

MR. VARGAS: I envision that staff would have that 

latitude in, for example, talking about each one of the plans, 

talking about different iterations of that particular plan; in 

other words, different revenue sources or different ways that the 

accounts could be structured, or larger versus smaller in plan 

one and plan two, and how that impacts the finances -- in plan 

three as well, of those plans. So I would agree that we should 

give staff that latitude. The only thing, and I think you 

mentioned it, is not to just bring in plans from the outside. 

But there are plans that have been -- that I have seen or have 

been discussed that could easily fit within the frameworks, one 

of the three frameworks, and can be further illuminated and 

discussed as other options. 

MR. FRENZEL: Thank you.

MR. VARGAS: Is that what you had in mind?

MR. FRENZEL: Thank you, gentlemen, for that assurance. 

 I just want to point out we have here a work in progress. The 

vote that we make on this motion does not bless any of these 

plans, nor all of them. 
87

CHAIRMAN PARSONS: That's correct. That's correct.

MR. FRENZEL: We are still fumbling and groping our way 

toward nirvana. 

CHAIRMAN PARSONS: I think that is well said and 

importantly said, that we are working our way to a final report. 

 This is not the final report. Mario.

MR. RODRIGUEZ: Well, I would just like to commend the 

fiscal group for really addressing the individuals that really, 

really need to be benefited by this reform that we are doing. 

That is the lower income workers in this country, that we are 

really addressing their need, because those are the individuals 

that really, really are going to be affected by what we are 

doing. So I would like to commend the group for all the hard 

work that they have done. 

CHAIRMAN PARSONS: Olivia and then John.

DR. MITCHELL: I will be brief. I guess I first wanted 

to thank the fantastic staff. I really think that all of us 

owe -- the nation owes a huge debt to these people, not an 

unfunded debt, however. 

(Laughter)

DR. MITCHELL: But I think Chuck has been masterful in 

his work. Steve has done amazing -- he is a superman. 

MR. POZEN: Steve doesn't sleep. We have all realized 

Steve does not sleep. 

DR. MITCHELL: I have gotten emails from this man at 
88

2:00 a.m., 3:00 a.m., 4:00 a.m., 5:00 a.m. When does he sleep? 

Jeff and Kent Smetters are both doing excellent work, and I am 

really very grateful. I think we should all be. 

Having said that, I now have a request for their future 

work. Maybe I buttered them up enough. I guess I would like to 

ask that the staff prepare the information that we look forward 

to to be discussed at our next meeting along two lines, at least 

two things that I would like to look forward to. First of all, I 

would like all the benefit estimates that are going to be 

generated to be always compared to what today's retirees are 

receiving, so that we always get a sense of relative proportions. 

 And I also would like to get a sense of what those benefit 

forecasts under the different plans would be in terms of benefits 

payable according to the current system. So that's a benefit 

structure request. 

Then the second part of the request was, could the 

staff prepare, and I think they are going to do this but I just 

want to support it, the results in terms of the different plans 

in terms of the unified budget, that is, what is the overall cost 

after all is said and done? Because we really can only in that 

sense look at the big picture.

CHAIRMAN PARSONS: I think that's fair.

MR. BLAHOUS: Sure.

CHAIRMAN PARSONS: John.

DR. COGAN: Let me just follow up on something that 
89

Bill Frenzel said.

DR. MITCHELL: Mike.

DR. COGAN: I think it is very important that if we are 

going to consider modifications that the public keep in mind that 

an implication of that is the options or the plans that are 

before the Commission now are not final by any means, and there 

very well may be significant modifications in them. There will 

be a tendency for the press to report that the Commission has 

locked on to three plans. That would be a premature conclusion. 

CHAIRMAN PARSONS: I am going to ask you to be very 

brief, because I want to give the last word to my distinguished 

co-chair. Bob and Estelle.

MR. POZEN: I just want to emphasize the plans two and 

three both bring the system back to solvency, and they do that 

regardless of whether or not people adopt the personal accounts. 

 I think that is critical. The changes in Social Security that 

are proposed are not there to finance personal accounts. First 

we get to solvency, and then personal accounts are a way to make 

those changes more attractive to people - and that's a big 

difference. 

CHAIRMAN PARSONS: Thank you, Bob. Estelle.

DR. JAMES: I just want to add to the burden that we 

are placing on the staff that Olivia raised. Olivia suggested 

various ways that the benefit numbers could be presented. Since 
90

one of the objects of one of the plans, plan three, is to 

maintain or exceed current wage replacement rates, I think it is 

very important to present these numbers also as benefits in 

relation to wages on average in the economy, so we get that 

aspect of the picture, because we don't get that aspect if you 

are just looking at dollars. 

CHAIRMAN PARSONS: I think some of these charts may 

find their way into an appendix, so that we can refer to it. 

DR. JAMES: Fine. Fine.

CHAIRMAN PARSONS: Gerry, and then Tim and then Senator 

Moynihan.

MR. PARSKY: Just one kind of specific request, and see 

if we can't add this. I think it would be helpful with respect 

to each of these three plans if the staff could look at the 

potential element of progressivity in each and how that could be 

configured into it, if that is all right with my colleague. I 

would like to kind of add that to the proposal. 

And second, just more generally, I also want to 

compliment the staff. They have really done a fabulous job for 

this group. I think it is important that at least from my 

perspective, the message out of -- one message general in nature 

out of this group is that none of these proposals are calling for 

the privitization of Social Security. None of them. That is not 

what this subcommittee is suggesting to the full Commission. But 

each of these plans, and this is a point that staff has made that 
91

I think is very important to come away with, each of them 

establish personal accounts that provide additional benefits to 

those people that choose them. That is, I think, a very 

important point. The personal accounts does not mean 

privitization of the entire system.

CHAIRMAN PARSONS: Okay. Tim, very quickly.

MR. PENNY: Yes. Thank you, Mr. Chairman. It has 

already been referenced that we would like something specific to 

deal with the other revenues that some plans might call for. 

Olivia described it as maybe unified budget. There might be 

other ways of illuminating that, and I think it has been agreed 

that that will be added to the criteria.

Secondly, Gerry just mentioned this progressivity 

piece, and Estelle mentioned minimum benefits. 

DR. JAMES: And wage replacement rates. 

MR. PENNY: That is a part of how we are doing 

progressivity. That needs to be better illuminated. Then the 

third would be safety net, which is some of those other 

categories, widows, those who have been divorced. That needs to 

be better illuminated. Fidel I think has accepted all three of 

these as sort of friendly amendments to his initial motion. If 

that is the consensus, then I guess that can be incorporated into 

the motion we are voting on. 

CHAIRMAN PARSONS: Senator.

CO-CHAIRMAN MOYNIHAN: I move that further --
92

CHAIRMAN PARSONS: There is a motion on the table. 

CO-CHAIRMAN MOYNIHAN: Then may I suggest that the 

debate come to an end, for the simple reason, sir, that we have 

12 days, and we have put these folks through an awful lot, but if 

we let them know it is only another 12 days. But I think we have 

a superb product here and we all should be very proud, but don't 

get beyond that capacity. We will be here, wherever we are, in 

12 days time with something that will be historic. 

CHAIRMAN PARSONS: All right. There is a motion upon 

the table that has been friendly amended I don't know how many 

times, but somebody is keeping track of all that. 

MR. : There's no objections I don't think.

CHAIRMAN PARSONS: Are there any objections? Can we 

say --

(No audible response)

CHAIRMAN PARSONS: Moved without objection.

CO-CHAIRMAN MOYNIHAN: All right. Vargas plan. 

CHAIRMAN PARSONS: We will back at 1:15. Senator 

Moynihan and I will be available for the press I guess in a half 

an hour in some room nearby.

(Luncheon recess)
93

A F T E R N O O N S E S S I O N

(1:22 p.m.)

(Away from microphone, simultaneous conversations)

CHAIRMAN PARSONS: We are going to talk through the 

remaining administrative issues so we can give staff guidance as 

to how to --- this forward. Chuck, I am going to turn it over to 

you.

MR. BLAHOUS: Well, Mr. Chairman, I think there is a 

general desire and the possibility that we can move through 

several of these issues very quickly. Remember, 7 of the 11 

issues on the administrative front have already been debated by 

this Commission, so we just need to bring ourselves to a point 

where we can decide whether there is a consensus view for a 

particular choice, or if there is not, we can just decide to 

present the multiple options in the final report.

The very first one is the most major subject, which is 

the overall structure for administering the personal account 

system. There are multiple options for doing so, which should be 

in front of every commission member, including a centralized 

system modeled on the Thrift Savings Plan and a mixed system. 

Those are the two options. Now I would leave it to the 

Commission to determine whether or not it wants to bring this 

decision to a point today and select between these two choices, 

or simply present both in the final report. 

CO-CHAIRMAN MOYNIHAN: Mr. Chairman.
94

CHAIRMAN PARSONS: Senator Moynihan.

CO-CHAIRMAN MOYNIHAN: Mr. Chairman and fellow 

commissioners, this seems to me to be just the kind of question 

we ought to leave the President and the Congress. It is not as 

if it is an amorphous set of propositions. The Thrift Savings 

Plan is in place. It is stable. We have heard the testimony. 

On the other hand, a perfectly good place to be made for 

administering this through the Social Security Administration 

which is a free-standing Administration with an administrator 

headed by the President. He may want to have a board appointed 

by the President. These are good choices both. Let us leave 

them to the decisions that follow, the principles we are trying 

to establish. 

CHAIRMAN PARSONS: Would it be consistent with your 

thinking to this Chair, that subcommittee, that we simply 

describe both and lay out pluses and minuses, and let the policy 

makers make the policy?

CO-CHAIRMAN MOYNIHAN: Exactly, sir. 

CHAIRMAN PARSONS: Is the Commission comfortable with 

that?

MR. FRENZEL: I think we had an awful lot of fun 

arguing about it -- 

CHAIRMAN PARSONS: All right. Speak into the 

microphone.

MR. FRENZEL: -- at subgroup. I think there was 
95

absolutely very little variance in the members' feelings about 

the matters on this afternoon agenda, save one item which dealt 

with how you -- well, let me go back. 

Most of the members expressed a preference for a tier 

one, tier two, a mixed program. At tier one you would start 

something like the Thrift Plan, and as the Senator says, that's 

enough of a description. They can figure out what they want to 

offer. But then there was a strong feeling by a number of 

members, both in the subgroup and in the other subgroup, that we 

needed competition and market action as soon as possible. So 

ideas were floated about having a tier two occurring after three 

years I think was the time frame. There was a lot of discussion 

on that and quite a lot of argumentation. 

Brother Beard raised the question this morning to some 

of us that we needed to be careful about this, because we needed 

to control the costs. After all, all of our assumptions, all of 

our run-outs require that we have a low cost, and yet we have a 

lot of people that believe that the best way to low cost is 

competition. We weren't interested in price caps, and we had to 

find our way through with some language. I think there is 

relative consensus, but we need to get certain individuals 

together with certain other individuals to work out some 

language. I think the thought here would be that as you went 

into tier two you would not have a lot of other offerings of 

products. 
96

CHAIRMAN PARSONS: Okay.

MR. FRENZEL: You would have a slight expansion over 

what you had in tier one, but there would be more managers 

injected in the system under a system -- under a standard set by 

whoever the trustees are that are managing the place, and I think 

the language with respect to those standards needs to be worked 

out. Perhaps if staff might proceed, we could then do what 

Senator Moynihan suggested, that I think the thing is relatively 

controversy-free, leaving that part open for discussion. 

CHAIRMAN PARSONS: Let me make the following suggestion 

then. To the extent -- and I know that you reflect the sense of 

the subcommittee, that there was consensus around most of these 

issues, and most of them were discussed fully at the last 

meeting, what I would ask Chuck to do is to just tick through in 

relatively efficient order the items on the administrative list 

and what you believe the consensus view to be, and then we can 

proceed by objection. If someone has an objection to the 

statement of the consensus, they can articulate that objection at 

that time. Then we save for the end the one on which you 

acknowledge there isn't consensus and we have some discussion 

around that. Does that make sense as a way to approach it?

MR. FRENZEL: Fine. 

CHAIRMAN PARSONS: Now, can you do that, Chuck?

MR. BLAHOUS: Yes, I can do so. The thing that is 

giving me pause is the very first issue happens to be the one 
97

where I am least confident of giving voice accurately to the 

Commission consensus, but I'll give it a shot.

CHAIRMAN PARSONS: Then put that at the bottom of your 

list. 

MR. BLAHOUS: Well --.

CHAIRMAN PARSONS: Go over the easy ones first, Chuck. 

 It is a management principle.

MR. BLAHOUS: Okay. All right.

CHAIRMAN PARSONS: Get some momentum.

MR. BLAHOUS: Let me start with issue two then, which 

actually happened to be the subject of the longest discussion 

last time. It had to do with this question of whether or not we 

should restructure the collection mechanism in order to reconcile 

payroll tax contributions with personal accounts more rapidly 

than the current system can do. Your basic options are to leave 

that unchanged and to leave that reconciliation period as it is 

before. The second one is to require more from employers in the 

way of reporting in order to speed it up. The third option is 

what I believe is probably the prevailing viewpoint, and that is 

that there shouldn't be any changes to the collection mechanism 

up front but that the governing board of the system would be 

instructed to investigate the feasibility of shortening the 

reconciliation period. 

CO-CHAIRMAN MOYNIHAN: Mr. Chairman, I think that is 

agreeable with the exception that I think we should specify that 
98

we are not intending to add any burden to employers in this 

process. And I would note, sir, that we have a paper here which 

anybody can have on the Treasury work on administrative issues on 

Social Security personal accounts. In the fall of 1997, the 

Clinton Administration began to analyze the proposals to create a 

system of individual retirement accounts, either as part of 

Social Security or outside it. --- has given a long paper ---

inside the administration of ---.

CHAIRMAN PARSONS: With that emendation, are we all 

comfortable with that statement of issue two?

(No audible response)

CHAIRMAN PARSONS: Issue three.

MR. BLAHOUS: Issue three. The first part of issue 

three was I think the subject of apparent consensus on the 

Commission last time, that the centralized tier one system should 

be modeled after the Thrift Savings Plan, and participants could 

choose from a combination of specialized index funds that is very 

similar to the five choices now in the Thrift Savings Plan. 

What was not settled was whether -- what would be the 

character of the investment opportunities available in an 

eventual mixed system. One possibility is for the private sector 

account administrators in a mixed system to offer the same 

passively managed funds as are offered in the TSP system, and 

possibly actively managed or broadly diversify mutual funds 

certified by the governing board according to some criteria and 
99

nothing beyond those. However, there have been some specific 

suggestions as to what should be the exact language of the 

choices, and perhaps we should throw that open for a little 

discussion before resolving it.

CHAIRMAN PARSONS: Well, let's find out first if we are 

all comfortable with the concept, because I don't want to turn 

this into a 15-member drafting session.

MR. BLAHOUS: Right.

CHAIRMAN PARSONS: So, would you restate what you 

thought the approach would be?

MR. BLAHOUS: I think the basic approach is that if and 

when there is a mixed system developed and another tier added to 

the basic Thrift Savings Plan model, that private sector account 

administrators would basically be told to offer the same 

passively managed funds that are available through the Thrift 

Savings Plan model, possibly actively managed or broadly 

diversified mutual funds certified by the governing board 

according to criteria outlined by the board.

CHAIRMAN PARSONS: But they develop at that time.

Right. Now. Bob.

MR. POZEN: I generally agree. Two quick points. In 

the Thrift in tier one, I think a lot of us have suggested that 

there should be an inflation-protected bond fund which is not in 

the Thrift Plan now, and I think we should say something about 

that. Second of all, I feel strongly if we are going to have a 
100

tier two, we have to offer something other than the same exact 

passive index funds that are in the tier one, otherwise there is 

no real point in doing it.

CHAIRMAN PARSONS: But I thought conceptually what I 

heard was that you could consider more actively managed things, 

but according to criteria developed by whatever governing board 

was there at the time, which seems sensible. Fidel.

MR. VARGAS: I was going to say on issue three, two of 

the three points, there's 3A, B, and C. On two of them there is 

a consensus, and on the third -- or on the second point is where 

there is the issue. My suggestion would be that we move forward 

with those that have consensus, and on the third just include 

both of the options that we have said, and, again, outline the 

pros and the cons of each, leaving those to the governing board 

as they decide to make those decisions, because I think the 

details of each of these need to be worked out in sufficient 

fashion that it would be -- we could possibly do it here, but I 

think it might be better left for those folks at that point.

MR. POZEN: I would respectfully disagree. I think if 

we say that we leave it to the board to develop the criteria for 

these other funds, that's -- there is a consensus that we need to 

at least contemplate the possibility of a second tier, and that 

we need to leave to the board after several years of experience 

the criteria. I think we can leave it that way and that's pretty 

good general --.
101

MR. VARGAS: That's direction that you can provide. 

Sure. 

MR. FRENZEL: It is true that we can probably agree on 

this quite quickly, but John and Gerry who are not with us have 

an abiding interest in this. So we need to have our opinion 

conditioned on their approval.

CHAIRMAN PARSONS: I think where we should leave this 

one, because I am actually hearing an awful lot of agreement --

MS. : Right.

CHAIRMAN PARSONS: -- is that we -- obviously the 

wordsmithing is going to be important here, but that is not the 

purpose of our meeting today to wordsmith. I think conceptually 

you have got your marching orders, and I suggest you move to 

number four, or move to the ones you can move through quickly 

first. 

MR. BLAHOUS: Okay. Well, issue four happens to be one 

where the Commission did reach a consensus last time and gave 

very clear direction. It had to do with the frequency of 

investment reallocations, and they decided, the full Commission 

decided, in public debate to basically limit it to a once-a-year 

open season. Staff was instructed to produce that, and we will.

The fifth issue has to do with distribution of assets 

in the event of divorce, and there are three options before the 

Commission. I would draw your attention to the second one, which 

I am told probably most reflects opinion, and that would be that 
102

all account balances attributable to contributions during the 

marriage and interest earned on the account balances brought into 

the marriage are split equally, but account balances brought into 

the marriage are not shared. That is probably what we took away 

as being the most likely consensus view on the last meeting.

CHAIRMAN PARSONS: It seems to me --

DR. MITCHELL: Question?

CHAIRMAN PARSONS: Olivia. The one thing that was left 

off of here, not to nitpick, is interest earned on account 

balances brought into marriage. You might just want to clarify 

where those go. 

MS. : Those are split equally.

MR. : They are split equally. Correct.

DR. MITCHELL: No. Interest earned -- oh, I beg your 

pardon. I take it back. Thank you. Sorry. 

CHAIRMAN PARSONS: Are you cool with that?

DR. MITCHELL: Add cool.

CHAIRMAN PARSONS: Okay. Number five. 

MR. POZEN: I think you have, Chuck, all earnings, not 

just ---.

CHAIRMAN PARSONS: Number six.

MR. BLAHOUS: The sixth issue had to do with preretirement access to account balances. I think there was a 

general consensus not to allow this, but there was some 

discussion of whether some concurring views on this -- whether 
103

individual commissioners might want to give voice to those in the 

Commission's report without taking apart the consensus against 

such withdrawals. 

MR. JOHNSON: Mr. Chairman, six, and I guess, Chuck, 

seven, six and seven go the issue of what flexibility would the 

recipient have in access to his or her account. On six it goes 

to this is before retirement, and the question is should there be 

some exception to access to this account pre-retirement as there 

exists now under the current Social Security system. My argument 

is for certain limited circumstances, and specifically aimed at 

disabilities in a family, there should be some access. I would 

suggest that the governing board have the direction from the 

Commission to implement certain exceptions similar to those that 

exist under the system today. I mean, we are not doing anything 

radical here on this one. 

CO-CHAIRMAN MOYNIHAN: Sir, could I suggest that the 

governing board be asked to take this under prayerful 

consideration.

MR. JOHNSON: Prayerful is the word. 

MR. BLAHOUS: All right, sir. 

MR. JOHNSON: Seven is for me a little bit more an 

issue of just philosophy, and I just can't come to grips with the 

Commission's position -- the most of the majority of the 

commissioners' position on this, and I will sort of try to give 

it my backdrop of how I approach it. 
104

Several years ago this country passed a welfare reform 

law, and we basically said, the Congress and the nation basically 

said to welfare recipients is that we are going to provide you 

with training and incentive to get off of welfare. We are no 

longer going to be paternalistic toward you where you can stay on 

welfare forever, but we are going to help you, and we are going 

to give you a certain period of time at which at the end of that 

time period and with the help we presented to you, we are going 

to eliminate you from the welfare system. They called it some 

form of tough love that goes with the system of where you are not 

guaranteed permanent welfare, but we are not going to be callous; 

we are going to create a system to encourage you, to help you, 

and in some instances we are going to always protect your 

infants, but you, the recipient, are going to get off welfare. 

Well, that I think is an appropriate way to encourage people to 

be as productive as they can. 

Now we flip that over to Social Security, and we say 

that we are going to create a system of private accounts, because 

we believe that the American worker should have the flexibility 

of maximizing his or her investments in the Social Security 

system which goes to their retirement, and we trust the people 

because ultimately at the end of the day, as the President said, 

it is the people's money. 

So we create this idea of private accounts that go 

towards retirement, and we trust the people by giving them more 
105

than just a simple option to invest in a bond fund or a CD; we 

come up with very flexible approaches to investment so that they 

can be -- take some added risk for some higher return, by 

providing them different tiers of investment opportunities, 

because we trust the people to make prudent investments with 

their money. And we allow this as part of their retirement that 

they would have this account, that if it builds up they can pass 

it on to their heirs and it's a wealth accumulation vehicle. 

So you take a worker who goes into the system for 25, 

30 years, 40 years, at the end of that 40-year period of 

industriously working every day to build up this retirement 

account, 45, 40 years in the work force, they reach the age of 

65. They are retired. They have accumulated this money in their 

personal retirement account. Again, this is not the portion of 

the account that goes into the Social Security system as part of 

their defined benefits, only the personal retirement portion. 

And as you pointed out this morning, Chuck, there's no threat in 

the event that this money is taken out to the overall viability 

of the system for every other worker.

So now the worker is 65. He or she now says, I want to 

take out in a lump sum my personal retirement account money, but 

the Commission members are suggesting we say to that worker now, 

we don't trust you. We don't believe that you will be prudent in 

the use of this money. So now we are going to sort of the 

opposite of what we do with welfare recipients. We're going to 
106

say, welfare recipients, you got to get on with your life and get 

a job or else we are going to cut you off. But to people who 

work 40 or 30 years of their lives who have demonstrated the 

responsibility in the work force, now retired, we are saying, we 

think if you got your money you'll blow it and you'll come back 

to us with your hand out. 

Well, we don't say that to welfare recipients. We say, 

if you blow it, that's tough. You're out of the system. But to 

people like the people in this room who are responsible people 

who would have a chance to take their own money out, it's their 

own money, it's the people's money, take their money out, move it 

from the four percent that we talked about, the conservative, 

play the odds game, move it up to seven percent, they've made 

themselves three percent better off with their own money. Or if 

they wanted to do whatever they wanted to, do it. 

Perhaps if we wanted to be just emphatic about it, we 

could have them sign a document that says, if you take your money 

and you blow it in Vegas, don't come back here. We can lay it 

out any way we want, but ultimately at the end of the day, I 

fundamentally believe you can't say to one group of the 

population we're going to treat you with tough love and say to 

another group of the population we don't respect your ability to 

manage your money so we're not going to give it to you. If we 

are going to do that, then let's not call it a personal 

retirement private account. Let's call it what it is: the 
107

government will invest your money, you'll do it but we'll 

encourage you to do it, and we'll control when you get and how 

you get it. 

I frankly don't see how the Commission members could 

accept a system that says to the public we don't trust you to 

manage your own money after you have been in the work force for 

40 years. I don't understand it. So I would strongly, strongly 

urge the commission members --

CHAIRMAN PARSONS: All right.

MR. JOHNSON: -- to allow the public to have access to 

their own money after they have retired and are free to do with 

their money as they so choose. 

CHAIRMAN PARSONS: Is there an opposing view? And then 

let's see where we go with this. Estelle.

DR. JAMES: I am not going to be nearly as eloquent as

Bob, but I do want to present a different point of view. Under 

the system of Social Security that we have today, which has many 

problems, one of its good features is that it gives you in effect 

an annuity that lasts your entire lifetime. So if you live many, 

many years after retirement, you will be getting some money that 

is indexed to inflation to every year. 

Now, as we discussed this morning, in two out of the 

three plans that we have been developing, the individual accounts 

would be replacing part of that defined benefit. So they would 

not be on top of, but they would be in place of. Now we think 
108

individual accounts would improve the well-being of people and 

enable them to achieve a higher benefit level than would be 

possible with any given resources from the DB, so we all support 

that, but the fact of the matter is, that the money in the 

individual account is replacing part of the DB. 

So now we have the situation where people reach 

retirement age. They may live 30 years after retirement. The 

wife of a retiree who is dependent on survivors' benefits from 

that -- from the work of that retiree may live 40 years after the 

spouse or after the husband retires. So we have to weigh about 

many lasting for the entire expected lifetime and in fact beyond 

the expected lifetime, because many people will live beyond 

expected lifetime, to the age of 90 or to the age of 100. During 

that time inflation will increase the number of dollars that you 

need to live on. If we have a 3 percent rate of inflation, after 

40 years you need 4 times, almost 4 times as many dollars to 

maintain the same standard of living that you did initially.

Now, unfortunately, many people may not take that into 

account fully. They may not fully realize how much longevity has 

been increasing. They may not fully realize how much inflation 

can erode the value of your initial benefit. And we as a society 

will be -- may be left in an uncomfortable position if people 

withdraw their individual account money at the age of 65, 

expecting to live until the age of 80, but then they live until 

the age of 90 or 100 and the money is gone. 
109

So that's the basic reason for limiting access to the 

money, to assure that it will last over the full lifetime of both 

spouses in the case of a marriage, and that's the reason for the 

discussions we have been having around this wording which says 

that in order to -- people should have some access to withdrawals 

but only after they have satisfied a threshold which ensures that 

from the DB plus the joint annuity people will not outlive their 

resources, and in fact, the resources will last throughout their 

lifetime adjusted for inflation.

CHAIRMAN PARSONS: Let me suggest we have had two, both 

eloquent, statements of perspective here, and I don't think that 

it is likely that Estelle who speaks for a fair portion of the 

Commission is going to persuade Bob of the merits ultimately of 

her argument, or vice versa. I wonder if this isn't one of those 

subjects on which there isn't consensus view - there is in fact a 

split view - and that the report ought to reflect the two 

different ways of looking at this and lay out the pros and cons. 

Fidel. 

MR. VARGAS: Yes. Actually, on that specific point, on 

issue six, I think I am clear unless I am totally just not on the 

same page, that everyone but Bob believes that people should not 

have access during their --

MR. : Accumulate.

MR. VARGAS: -- before retirement. And there's 

different reasons why people believe that, but ultimately that's 
110

I think the recommendation. However, I don't think it precludes 

us from including in the report the argument for studying, as was 

suggested by Senator Moynihan, having a government board study if 

at some point what would be those circumstances, but our 

recommendation at least initially from the Commission would be, 

because I think there is a majority here that believes that. So 

that would be my sense of more where we are at on issue six, that 

we should move forward with a recommendation on that issue. 

Then on issue seven, I think similarly we are -- that's 

an issue where it is the same kind of a breakdown in terms of 

where we are all coming down on the issue. So I don't want to --

I don't know if we need to have everybody, if that's what we are 

looking for, or if we are looking for a general recommendation 

and additional commentary on these issues. 

CHAIRMAN PARSONS: To tip my hand bit, what I would 

like to avoid are sort of votes, split votes. I don't think that 

is helpful to presenting a kind of unified and thoughtful front. 

 I think in wording, however, we could use wording saying that, 

while the majority of the Commission felt that this may be the 

way to go, others felt that there is another way to go, and these 

are the pros and cons around it, or these are the rationale.

CO-CHAIRMAN MOYNIHAN: (Away from microphone) 

Mr. Chairman, can I volunteer to try to draft language which we 

clear with Bob and clear with Estelle and clear with you?

CHAIRMAN PARSONS: You can if you want to. I don't 
111

know that I would do that if I were you. You are my friend. 

CO-CHAIRMAN MOYNIHAN: I learned early in life not to 

volunteer, so I haven't until this moment. 

CHAIRMAN PARSONS: In other words, I think we can 

handle it --

MR. VARGAS: That's fine. Sure.

CHAIRMAN PARSONS: -- without ---. Olivia.

DR. MITCHELL: I think Bob had a ---

MR. JOHNSON: No, I just wanted to point out one point 

about Estelle's response. She's absolutely right, that those 

people who do live longer would have the benefit of an annuitized 

distribution, but one of the concerns I have is that the African 

American population is going to not live as long, and so we still 

have this ongoing subsidy of workers who have a higher mortality 

rate subsidizing those who have a lower mortality rate. So 

getting access by those workers to their personal private 

retirement account seems to me to go a long way towards 

addressing that problem. 

CHAIRMAN PARSONS: Now.

MR. JOHNSON: And I think it's, again, imperative that 

we deal with the question of equitable distribution as well as 

this whole question about the paternalism of that they may not be 

smart enough to realize that they are going to live longer than 

they think they are going to live and therefore not save their 

money properly. 
112

CHAIRMAN PARSONS: Fortunately for all, Senator 

Solomon -- I mean Senator Moynihan, has volunteered to try to 

find some language --

CO-CHAIRMAN MOYNIHAN: And we have the data on the 

point ---.

CHAIRMAN PARSONS: -- that leads us through this 

thicket. Bill.

MR. FRENZEL: We trust Senator Moynihan to do a perfect 

job, but I think it is fair to remember what Fidel says is true. 

 Everybody except Bob. 

(Simultaneous conversation)

MR. FRENZEL: It failed in the subgroup. 

MS. KING: Bill, on that subject, on number six that 

might be true, but on number seven, that is not true. 

MR. FRENZEL: Yes. Yes. Yes. 

MS. KING: That is not true.

CHAIRMAN PARSONS: Okay. This is helpful for the 

public to know that we --

MR. JOHNSON: I'll trade six for seven. 

(Laughter)

CHAIRMAN PARSONS: Actually, I -- yeah, right.

DR. MITCHELL: Mr. Chairman.

CO-CHAIRMAN MOYNIHAN: No wonder he ---.

CHAIRMAN PARSONS: Olivia.

DR. MITCHELL: Thank you. I am not going to speak 
113

directly to that point. I am going to speak to seven more 

particularly. It seems to me that we have a huge opportunity to 

educate people about this issue of longevity risk, and the fact 

is that life expectancies are going up and that we need to think 

seriously about better ways to try to protect against that, so 

that in this discussion around seven, what choices should be 

available for taking the account distributions, I think we need 

to spend some time in the report talking about annuities, what 

good are annuities, what role they play. 

Estelle mentioned in her comments that Social Security 

currently is a price indexed annuity, so even if you live a long 

time, your benefits go up with prices. Now, there are other 

annuities which are nominal fixed annuities, so they don't go up 

with prices. There are variable annuities which go up and down, 

say, with the stock market. So it seems to me that we need to 

talk about results potentially in our report, results which at 

least give us price indexed annuities as one of the metrics to 

look at the benefit outcomes, and if there's other metrics as 

well, other forms of annuities, we can go that route, but we 

definitely need to talk about price indexation for the annuities, 

because that is what Social Security does now. 

CHAIRMAN PARSONS: I think that can be accomplished 

within the context of how we are talking about dealing with this 

issue. Tom.

DR. SAVING: To go with Olivia's comments and to 
114

address Bob's more directly I think, because Bob's comments come 

from the fact that the annuity markets themselves don't 

appropriately or at least there may not be markets that 

appropriately account for expected longevity for different 

groups, and if those annuity markets did that appropriately, then 

you don't have this problem. But the issue is, now if you have 

unisex, unirace, unieverything annuities, then of course those 

individuals who have lower life expectancies are going to lose, 

because they are subsidizing everyone else. But the issue is --

and that's why I think Olivia's point of the report addressing 

these annuity issues is important. 

I don't mind having different views as to what we ought 

to be able to do at the end, because I think this is a really 

important point for people who know they have a shorter life 

expectancy, and, for example, an AIDS sufferer or any number of 

things which you know you have a shorter life expectancy, the 

annuity markets ought to adjust for that. If they don't exist, 

there may be some other way to do it. I think it is important to 

recognize these differences and say that in this report, this 

discussion and Olivia's suggestion about annuities and educating 

people on annuities. Bringing up these issues is important. 

DR. MITCHELL: I know I had asked Jeff to offer a few 

words. I don't know if now is the appropriate time. Since we 

are on the topic. I had asked that at the last Commission 

meeting. 
115

CHAIRMAN PARSONS: This was a request you made to Jeff?

DR. MITCHELL: Yes.

CHAIRMAN PARSONS: Well, then I think we ought to honor 

it. 

DR. MITCHELL: So I am wondering if he can tell us now 

the executive summary of the deliberations. 

CHAIRMAN PARSONS: Jeff isn't as sure as I am. 

MR. BROWN: I would be happy to, though I will say that 

I think most of the important points have been made. So let me 

just say one or two things. There were really three points that 

I was going to make, and I will just make them and be brief on 

the follow-up. 

The first is that because of what is often longevity 

risk, which is the fact that any individual, regardless of what 

their life expectancy is, faces great uncertainty about just how 

long they are going to live, has the potential to benefit from 

annuity payments, and annuities typically are considered to be a 

very important part of providing a secure source of retirement 

income. The main way to think about this is because if you just 

take an average individual in the population, for example, using 

SSA numbers, the typical male in the population using recent 

numbers at age of 65 can expect on average to live about another 

16 years. However, that same individual, unfortunately, has a 1 

in 8 chance of dying prior to the age of 70, but somewhat more 

optimistically, they have about a 1 in 5 chance of living to the 
116

age of 90 or beyond. So even if the life expectancy differs 

across different groups in the population, each individual, 

nonetheless, faces some significant uncertainty, and that 

requires that they make a tradeoff when they have a stock of 

wealth from which to allocate across the rest of their lifetime. 

 They are not quite sure how quickly or how slowly to consume out 

of that wealth, and annuities are a very important vehicle for 

basically ensuring against that longevity risk. 

The second point that I would make is that the 

current -- in the current system, Social Security is by and large 

the primary source of annuities for people currently in the 

United States, though in part that is largely because the 

existence of Social Security has likely crowded out a lot of the 

private annuity markets. In spite of that, there is a small but 

very vibrant life annuity market in the United States, and the 

private market is also quite capable of providing these things, 

along with what my third point would be, a very wide range of 

options that are available. 

I think this discussion has highlighted some of the 

fundamental tradeoffs between pure life annuities and the ability 

to bequeath wealth or spend that wealth how one wishes. It 

should be noted, and we can discuss this in the report, that 

there are a wide range of annuity designs that allow people to 

find intermediate points along that way. For example, there are 

products which are quite popular through TIAA-CREF, for example, 
117

which allow for this life longevity insurance protection in an 

annuity, which also make provisions in the event that if the 

individual were to die shortly after annuitizing that payments 

would continue to their beneficiaries or their heirs for some 

number of years. So it's a way of finding that middle ground.

We are happy to discuss these options in the report. I 

am also happy to talk with any of you individually if you would 

like more information on that. 

CHAIRMAN PARSONS: Let me add also, and I just 

conferred with the co-chair on this, we have been from the 

beginning struggling to come up with a consensus report that 

reflects the thinking of all of us and that we can all be 

comfortable within, but the "one size fits all" -- and that's 

still the route we're on, but the "one size fits all" sometimes 

binds a little bit. Just as Senator Moynihan and I will probably 

have a preface to the report from the co-chairs, I think it 

probably is appropriate, I want to offer it up for your 

consideration and we can revisit it before we conclude this, that 

perhaps at the end of the report we allow individual 

commissioners, those who choose to take the option, to sort of 

add additional thoughts, but the body of the report should be a 

consensus. If there are sort of additional things or points of 

emphasis to highlight as opposed to dissents. This way we don't 

want to -- that might be a useful thing to do, and we can take 

that around. 
118

MR. JOHNSON: Mr. Chairman, I think that's a -- I agree 

with that, and I think that we could probably arrive at some, 

hopefully some consensus, but on the annuity issue, I think that 

we should point out that one of the objectives of the private 

accounts concept was to create wealth that could be passed on to 

heirs. If everybody takes the annuitized route, there is no 

pass-on of the accumulated wealth. So it argues that by having 

some methodology to take out lump sum amounts would put you in a 

position to have a wealth accumulation component that you could 

pass on in your estate. So we shouldn't see annuities as sort of 

the answer to the whole ---

DR. MITCHELL: But I think that it --

CHAIRMAN PARSONS: Whoa, whoa, whoa. Because this 

debate which has raged on, and as I say, no one is changing 

anyone's mind here, can continue to rage on, I think what we need 

to do is find a way to deal with it in the consensus report, and 

then to the extent that individual commissioners have further 

thoughts they want to share, as I say, not dissents but further 

perspectives, they will be given the option to do so. 

CO-CHAIRMAN MOYNIHAN: On to your typewriters ---.

(Asides)

CHAIRMAN PARSONS: Point number eight, Chuck. 

MR. BLAHOUS: The next one has to do with distribution 

rules for protection of surviving spouses. One of the options 

before the Commission is that a joint survivor two-thirds annuity 
119

as under Social Security would be required unless both spouses 

agree to an alternative arrangement. You have a couple of 

options before you, but I think that is probably the one that 

most commissioners have sounded interested in. 

CHAIRMAN PARSONS: As proceeding by objections, seeing 

none, point number nine. 

MR. BLAHOUS: Number nine, responsibility for financial 

education. Options before you include this being provided at the 

option of employers. Another option includes private sector 

account administrators, and another option is basically to have 

the governing board and the Federal government responsible for 

supplemental financial education. Probably the prevailing 

position that we have heard at the staff level is that the 

Federal government and the governing board be responsible for 

this. 

MR. FRENZEL: May I? We keep talking about education.

CHAIRMAN PARSONS: Microphone. 

MR. FRENZEL: We keep talking about education, and a 

lot of us have tried to be educated in this field for a lot of 

years with not a huge amount of success. I wonder if we

shouldn't use the word "information" instead of education. We 

are not running any school of rocket science here. Just a 

suggestion. 

CHAIRMAN PARSONS: I think --

CO-CHAIRMAN MOYNIHAN: I believe that was a motion, and 
120

I would like to second it. 

CHAIRMAN PARSONS: Without objection. Both your sense 

of the consensus and using the word "information" as opposed to 

education. 

MR. BLAHOUS: Issue 10, structure of the governing 

board to protect it from political interference. One option is 

simply to model it after the Thrift Savings Plan and have it 

conduct in the same way.

CHAIRMAN PARSONS: And is that the option that your 

sense was --

MR. BLAHOUS: That is the option that --

DR. MITCHELL: I think we need some discussion. 

CHAIRMAN PARSONS: Lead it off.

DR. MITCHELL: I wasn't part of that group, so I really 

don't have any insight into those issues. I would like to hear a 

little bit of discussion about the following. The notion of a 

TSP-type governing board making a decision about whether it will 

allow competition against itself in a hybrid sort of a model 

makes me sort of uncomfortable. That is, I could see some sort 

of supervisory, regulatory structure deciding that, yes, the time 

is ripe for private folks to come into the market, or that yes, 

these are the criteria that the different accounts should meet, 

but I worry when you have the TSP equivalent board deciding on 

its own whether it is ready to accept private competition, 

private sector competition. I just think there is a conflict of 
121

interest. So I would like to lay that issue out and ask whether 

there is some intermediate ground we might take, so that they 

wouldn't have to be making that decision about themselves. 

CO-CHAIRMAN MOYNIHAN: Might I plead that this is an 

item for addendum, commentaries at the end, because there is a 

huge political -- why, I don't know, notion that we are going to 

turn this all over to Wall Street. 

MR. FRENZEL: I think if the gentleman will yield, I 

think we can take care of that in our layout of tier three where 

direct -- tier two where we direct the trustees to broaden and to 

widen the number of managers based on reasonable criteria. It 

would seem to me it would be hard for them to freeze anybody out 

under the -- carrying the burden of that direction. 

DR. JAMES: We could even specify a time period by 

which they are directed to do that, and I --

CHAIRMAN PARSONS: Mario.

MR. RODRIGUEZ: The consensus I am hearing is that we 

have some form of board but that we are completely against having 

some political influence, in other words, having Congress have 

this decision?

CHAIRMAN PARSONS: Well, on this point I think what 

Chuck was reporting was the consensus was that it should be a 

TSP-type board governmentally formed and appointed, but what 

Olivia is saying is that at some point that board is going to be 

constitutionally at a point of conflict if -- in terms of 
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considering whether they should open up their process to 

marketplace competition, which we understand, but --

DR. MITCHELL: If I can just elaborate, it seems to me 

that the TSP model right now is one where they take the money in, 

they invest the money, they do the reporting, they do the whole 

thing, soup to nuts, and they are actually self-regulating. Now,

if you take the private sector model, pension funds take the 

money in and invest the money and so forth, but there is a 

superstructure, ERISA. It is the law that -- and there are 

agents that -- agencies that look and correct the system when 

there is a problem. Seems to me you want to separate the 

supervisory and regulatory role from the money management role, 

because otherwise you have the folks regulating themselves.

CHAIRMAN PARSONS: Yes. 

DR. MITCHELL: So that's really the point I am trying 

to make, is that you don't want a TSP self-regulating, because 

then you don't have oversight. 

CHAIRMAN PARSONS: But I think what I am hearing is 

that that's probably not the consensus view. 

DR. MITCHELL: Well, that was the consensus view of the 

subcommittee. I wasn't on that subcommittee. 

CHAIRMAN PARSONS: I understand, but we --

DR. MITCHELL: That's why I am expressing my views. 

CHAIRMAN PARSONS: That is where I was going. 

MR. POZEN: I think that what Bill said was perhaps 
123

responsive for two things. One is if there was a direction to 

the board within, say, three years to develop such a system, then 

you couldn't -- then you wouldn't worry that they wouldn't do it. 

 Then second of all, I think that we would contemplate that the 

entities that would be set up to manage this money would be 

subject to regulation by the SEC and the normal financial 

regulators, and I think we could do both of those things as a way 

to be responsive to your legitimate points. 

CO-CHAIRMAN MOYNIHAN: Could I tell a war story? It is 

 1935 and the Social Security Act is on the Senate floor having 

passed the House, having passed out of the Finance Committee, and 

it provides, as did President Roosevelt ask, that there be 

annuities as part of the system, whereupon a Senator from 

Connecticut stood up and said, "We don't like this in Connecticut 

one least little bit, because Hartford is the insurance capital 

of the nation and we will provide annuities, thank you very much. 

 I move to strike." And he won. So that's ahead of all of us. 

CHAIRMAN PARSONS: All right. I think the message is 

that you can attempt to design to the nth degree here a system 

that inevitably is going to get beaten and reshaped. I think the 

point you raised, Olivia, is a fair point. I think the report 

should reflect it, and will reflect it, and that we can 

accomplish that without trying necessarily to redesign -- to lay 

out the complete design of how it should work.

CO-CHAIRMAN MOYNIHAN: Well said.
124

CHAIRMAN PARSONS: Point number 11, Chuck.

MR. BLAHOUS: Point number 11, voting of equity shares 

for the centralized system. Your basic options there are to have 

them voted by the fund managers, voted by the governing board, 

and simply voted in proportion to the votes of other 

shareholders. As reported to me, the leading view is to have 

them voted by the fund managers, but this could perhaps be 

subject to discussion.

CHAIRMAN PARSONS: We are proceeding by objection. I 

don't see one. Point number 12. 

MR. BLAHOUS: Well, I only have 11, which brings us 

back to number one. 

(Laughter, asides)

CHAIRMAN PARSONS: Dejà-vu all over again. 

MR. BLAHOUS: Fortunately it is the only one left, and 

now you just have to decide whether to decide on number one and 

whether there is --

CHAIRMAN PARSONS: State the issue if you would please. 

MR. BLAHOUS: -- a consensus view of multiple --

CHAIRMAN PARSONS: State the issue.

MR. BLAHOUS: The issue is the overall administrative 

structure, whether to just have a centralized system or a mixed 

system. I could read the entirety of it, but I don't want to 

bore the commissioners.

CHAIRMAN PARSONS: No, no, no. Just summarize the 
125

issue for us so we can have a ---.

MR. BLAHOUS: Basically, the centralized system is very 

similar to the Thrift Savings model. Collections are transferred 

to a central administrator through the current payroll tax 

system, and again, the Thrift Savings Plan model is the basic 

model there. The mixed system basically has a second tier which 

enables people to go out to private account administrators under 

certain guidelines, minimum account balances and the like.

CHAIRMAN PARSONS: But didn't I --

(Simultaneous conversation)

CHAIRMAN PARSONS: I thought I heard, yes, consensus 

that we would start with a centralized system, give them a period 

of time to come back.

MR. FRENZEL: We have tier one, and after three years a 

tier two.

CHAIRMAN PARSONS: Yes. By some number of years to 

come back.

CO-CHAIRMAN MOYNIHAN: Mr. Chairman, we have agreed on 

item one.

MR. BLAHOUS: You're done. 

CHAIRMAN PARSONS: So ---. 

MR. POZEN: A deferred tier two. 

CHAIRMAN PARSONS: You got it. 

MR. POZEN: According to reasonable guidelines. 

CHAIRMAN PARSONS: Now, we have worked our way through 
126

the administrative portion of it. We have a second or two for 

any concluding remarks. Also, I saw one of my fellow 

commissioners wince when I suggested the potential for --

MR. PENNY: Addendums.

CHAIRMAN PARSONS: -- individual addenda. You want to 

speak to that? That's something we should --- agreed upon ---.

MR. PENNY: Well, it just seems to me that the few 

areas in which we seem to have some disagreement are areas that 

for the most part can be resolved. As an example, the Chairman 

has agreed to find some language and work things out, and I trust 

that that can be done. And it may be that if there is another 

contentious issue or two that may be more difficult than even the 

Chairman's talents can address, that maybe we might want to 

consider at our next meeting a punting on those issues. I would 

much rather do that than to have page upon page of additional 

comments and thoughts and "yeah buts." I want a report signed by 

all of us, and I don't want any of us issuing additional thoughts 

or comments that only confuse the issue. 

MS. : Here, here.

(Applause)

CHAIRMAN PARSONS: Are there any thoughts on that? One 

more.

MR. VARGAS: No, I would agree with that, because I do 

think that we -- although our next meeting is 11, 12 days away.

CO-CHAIRMAN MOYNIHAN: We would be the first unanimous 
127

Social Security Commission in history.

MR. VARGAS: Absolutely, and I think that we can get 

there. Secondly --

(Simultaneous conversation)

MR. VARGAS: Secondly, just as a kind of a procedural 

matter, I am assuming, and this is a question for the Chairs and 

for staff, that what we will have on the 11th is a draft, a 

cleaned up version, and that where there are issues that still 

haven't been addressed like this wording issue, those are the 

issues that we will spend some time on. 

CHAIRMAN PARSONS: Hopefully by the 11th, all issues 

will have been addressed in one way, shape or form. 

MR. VARGAS: No, absolutely.

CHAIRMAN PARSONS: To the satisfaction of the full 

group, maybe not, but --.

MR. VARGAS: No, absolutely. And so my point is that 

on those issues that were addressed today where it wasn't clear, 

that we will have to come back and say this is where we are 

going, this is the direction that we are going in.

CHAIRMAN PARSONS: Listen.

MR. VARGAS: Either everybody's onboard or they are 

not, and everybody is not completely satisfied with everything, 

but in general we have all -- we are all going in the same 

direction. 

CHAIRMAN PARSONS: --- of the group. The sense of the 
128

group is that we can get there. I am for that. It would be 

historic. It may mean that we really have to wrestle with some 

of these wording issues, more than some of us who would be 

wrestling would care to contemplate right now, but if we are all 

comfortable to stay on the course that we have been on, that's 

fine with me. Is that fine with you, Senator?

MR. FRENZEL: As long as the Chairs aren't doing all 

that work.

CHAIRMAN PARSONS: That was implicit. 

MS. KING: Mr. Chairman, am I clear that in addition to 

number seven, issue number seven where lump sum distribution is 

not specifically laid out, that the only other issue that is open 

is 3B, what investment opportunities should be available? Is 

that right?

CHAIRMAN PARSONS: Well, there's 6B.

MS. KING: I thought six was --.

MR. : Six is gone. 

CHAIRMAN PARSONS: No.

MS. KING: Six is the one the Chairman is going to --

CHAIRMAN PARSONS: Now six and seven --

MS. KING: -- solve.

CHAIRMAN PARSONS: -- are the ones the Chairs agreed to 

come up --

MS. KING: You are going to work on seven as well. 

MR. : I think six was conceded.
129

MS. KING: And 3D?

MR. FRENZEL: Actually, that isn't the issue as much as 

how you tell the trustees to arrange tier two, mandate that they 

do so, and how they select or the process they select to 

incorporate a number of managers to ensure rigorous competition. 

 I think the product everybody has agreed can be expanded 

slightly, but I don't think anyone disagrees about that. There 

may be some well-diversified, actively managed funds added, but 

that would be about the main difference between tier one and tier 

two with respect to ---.

CHAIRMAN PARSONS: And I think, gentlemen, that to get 

more granular on this list now, you actually have to see the 

language.

MS. KING: Yes, I agree with that, because my concern 

is that we have some clear path about administrative costs and 

that we don't encourage a system where the offerings are so broad 

that administrative costs go up the charts.

CHAIRMAN PARSONS: Right.

MS. KING: So I want to really hammer that one.

CHAIRMAN PARSONS: I think we are all sensitive to 

that. 

MR. FRENZEL: We have a drafting committee of 16.

MS. KING: That's what we need, Bill. 

MR. FRENZEL: You're the last -- most recent recruit. 
130

MS. KING: On the telephone, thank you. 

CHAIRMAN PARSONS: Okay. 

CO-CHAIRMAN MOYNIHAN: Thank you, Mr. Chairman. 

CHAIRMAN PARSONS: I am sensing a desire to adjourn. 

Don't ask me why, I just am sensing this.

CO-CHAIRMAN MOYNIHAN: So moved.

MR. FRENZEL: Second.

CHAIRMAN PARSONS: Motion. All in favor?

(A chorus of ayes)

CHAIRMAN PARSONS: Opposed, same sign?

(No audible response)

CHAIRMAN PARSONS: We stand adjourned. 

(Whereupon, the meeting was adjourned at 2:22 p.m.)