President’s Commission

to Strengthen Social Security

Friday,

November 9, 2001

Held at the

Park Hyatt Washington

Washington, DC

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9537 Elvis Lane

Seabrook, Maryland 20706

301/577-5882
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President's Commission To Strengthen Social Security

November 9, 2001

Commission Members

Richard D. Parsons, Co-Chair

Leanne Abdnor

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 Parsky

Timothy J. Penny

Robert C. Pozen

Mario Rodriguez

Thomas R. Saving, Ph.D.

Fidel 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

November 9, 2001

Page

I. Opening Statements

by Senator Moynihan 4

II. Administration of Personal Accounts 41

III. Achieving a Fiscally Sustainable

Social Security System 103

Keynote: --- indicates inaudible in transcript.
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P R O C E E D I N G S

(10:10 a.m.)

WELCOME AND OPENING REMARKS

by Senator Moynihan, Chair

CHAIRMAN MOYNIHAN: November 9 meeting, and this 

is the -- I think we are right in the middle aren't we, 

Richard?

CO-CHAIRMAN PARSONS: Yes.

CHAIRMAN MOYNIHAN: That we have a meeting later 

this month, and then December 11th. And so, our first item 

on our agenda, and the first matter, as our practice has 

been, is to have opening statements. They can be as 

extensive or curt -- no, no, curt, brief, as anybody wishes. 

 And why don't we begin with you, Lee.

I. OPENING STATEMENTS

MS. ABDNOR: Thank you. Thank you, Mr. Chairman. 

 I have been thinking a little bit about what I feel is very 

important to talk about from my experience. And having been 

on this commission, I think the most recent commissioner, 

but I have had the privilege of being able to listen to all 

of the witnesses who testified, and read all of the 

statements that have been submitted, which have been very, 

very helpful.

There is two things that stick out in my mind. 

There is a lot of things, but the two that I think are most 
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important are the following:

First of all, we have been most appreciative of 

those people who have come before us, or presented 

statements in which they are willing to put forward what 

they believe is the best way to meet the fiscal imbalances 

in the future of social security.

We have been appreciative, and we have looked 

closely at what all of those have presented. It has also 

been very clear then that how important it is for everyone 

who is involved in this debate to be willing to put forward 

what they believe is the best way to achieve fiscal 

sustainability of social security, and ensure that benefits 

will be paid in the future.

And I guess what I am trying to say is that there 

are some groups who are very critical of personal retirement 

accounts. That is fine, and we welcome all views. But I 

would just like to point out how important it is to me and 

some of the other members of the commission that those who 

are critical of personal retirement accounts, and the 

principles laid out by the president, in order to be 

considered by us, and I think the rest of the public need to 

put forward their own plan for what they would do to meet 

the promised benefits and sustained system in the future.

Without that, very little is offered to the 

debate. And so, we continue to ask and encourage those 
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groups to come forward with their own plans and not vague 

ideas, but specific plans. And we will continue to 

encourage that and look for that. And if these groups want 

to be considered, that's what we will need from them and 

appreciate it.

The other point that I would like to make has to 

do with women. I have been thinking a lot about this 

lately. I am very, very grateful to all that those who have 

fought for women's rights have done for the last hundred 

years or so, and we have certainly come a very long way in 

recognizing the rights of women and the value of women in 

our society.

I think the reason that this has come forward to 

me real recently is all of these news reports that we have 

in the last few weeks about women in other countries. And 

seeing some of the horrific experiences of women in other 

countries who don't have rights, and who in fact in some 

countries have to -- are not allowed to go out in public, 

and some who are fleeing just to save their own lives.

And I think it breaks all of our hearts to see 

that, and reminds us of how important it is to not forget 

that we have come a long way, and we have got a ways to go 

as well. And I think that, in that light, the frontier left 

that I think of most that women need to gain in order to 

achieve real value and independence in our society is 
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financial security.

And we have got a ways to go there. We have come 

a long way, but we have got a ways to go. But that freedom 

that comes from financial security is imperative in order to 

have true freedom in our society. I think that we have two 

very, very important goals along those lines.

First, is to eliminate poverty among the elderly. 

and the majority of those who are still in poverty in old 

age are women, and this is not okay. And I think that this 

has to be our first and foremost priority and goal. And 

that may include strengthening that safety net from social 

security, not that ensuring that it stays, but strengthening 

it to raise even more people out of poverty in old age.

But the second point is that I also believe very 

strongly that we have to give women the choice on whether or 

not they are going to take part of their payroll taxes and 

invest it in 401-type (k) accounts. And begin, for some 

women, to have the opportunity to create ownership and 

wealth for the first time.

We are talking about financial freedom. We are 

talking about a voluntary program. How do you argue? How 

do you oppose a voluntary program? And I think that if we 

are truly wanting to help create more financial security for 

everyone.

And we have got to be able to give choice to all 
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workers, and that includes -- obviously, it includes women. 

 And I have talked before about my disappointment with some 

women's groups who are opposed to giving women this choice. 

 And I think we have to stand firm in favor of giving 

workers this choice.

So, those are the two points that I want to make 

that I think are critically important as we move forward as 

a commission, and develop our own plans for putting this 

system back on a fiscally sustainable path. Thank you.

CHAIRMAN MOYNIHAN: We do thank you. And I think 

you would agree, and I think the commissioners would agree 

that this is a matter which we might help resolve for the 

social security system itself, if we think about it in terms 

of the individual accounts.

As our commission, Gwen, will agree we are still 

stuck in that mode, if you are married for 91⁄2 years and 

divorced, you get no social security benefits. If you are 

married for 101⁄2 years, you get half. Well, it is more 

complicated than that. And so, we will get to that point. 

Professor Mitchell.

DR. MITCHELL: Yes, sir. Good morning, Chairmen 

Moynihan and Parsons, fellow commission members, and ladies 

and gentleman. I am very happy to have an opportunity to 

speak today about some of the positive aspects of personal 

accounts at this meeting of the Commission to Strengthen 
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Social Security.

I would like to emphasis several positive aspects 

about personal accounts within the context of a strengthened 

social security system. I support personal accounts because 

I think they can play a very important role in giving 

workers choice and control over retirement saving.

I also think they serve another function which is 

that they will serve to educate workers regarding retirement 

saving and retirement responsibility. Today's social 

security taxes workers on their earnings. But recent 

surveys show people, most people, even people near 

retirement have no idea of what these taxes will produce in 

terms of eventual benefit.

One reason that people have such misinformation 

and misunderstanding is that this system is amazingly 

complex. Even in the process of serving on this commission, 

I have learned a great deal about the system, and I worked 

on this for 22 years. Maybe that testifies to my small 

intellect, but we'll move on.

A personal account I think will provide 

participating workers with one piece of the retirement 

system that is simpler to understand that the current 

alphabet soup of AMEs, PIAs, NRAs, EEAs, and other terms 

that frequently confuse us within social security.

A second reason that workers don't know what they 
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will receive in retirement is that, as Lee mentioned, the 

system faces insolvency. When the baby boom generation 

retires, benefit payments will rise, or at least promise 

benefit payments will rise, but there is too little payroll 

tax revenue to pay for it.

So, no one can honestly promise today's workers 

that current benefit formulas will apply to any of us when 

we are ready to retire. The system therefore imposes 

substantial risk on today's workers, while it gives them a 

very low return and no choice about how much risk they would 

like to bear.

Personal accounts I believe can help, because they 

offer the promise of limiting political uncertainty 

associated with old age benefits. This is because these 

accounts will be funded plans in which people will be able 

to invest in well-managed, low cost retirement accounts.

Having funded personal accounts also gives workers 

an additional saving amount when they contribute more. This 

is beneficial, particularly, compared to today's environment 

where many people, especially women, get little or nothing 

in return for paying additional social security taxes.

Another positive outcome for instituting personal 

accounts will be that workers will begin to become more 

financially literate. It is critical for both workers and 

retirees to understand better, and to take more 
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responsibility for their retirement well being.

One reason I think we are here today is that 

social security participants in the past were told that 

benefits could be raised and covered, increased without 

anybody figuring out how to pay for it. We know today that 

this is not responsible. And we also know that participants 

should have been better educated from the beginning.

Personal accounts I think can enhance the need 

for, and the provision of, retirement education. Finally, 

and most importantly, having personal accounts will permit 

workers to choose the level of risk and return in their 

investment portfolios that suit them.

One study, for example, has found that women's 

lifetime earnings patterns are uncorrelated with stock 

market returns. So, this would imply that women might be 

particularly benefitted by diversifying into the stock 

market.

Of course, people's choices wouldn't have to 

remain fixed over their lifetimes. They could be adapted as 

their plans change. For example, younger people might want 

to take additional risks with higher expected returns, and 

others, perhaps, such as myself, will elect to put their 

money in more secure investments such as inflation linked 

bonds which provide a very important component of their 

retirement portfolio.
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The bottom line is that adding choice to the 

retirement portfolio via personal account gives account 

gives people much needed choice over risk and return, and a 

very critical element of control. Some people say to me 

don't worry. Just let future Congresses take care of us 

when the money runs short.

But, as a baby boomer, I believe it is 

irresponsible to put this burden on future Congresses and on 

our children and grandchildren. In 30 years time, many of 

us will have far fewer degrees of freedom than we have 

today.

It is much more responsible to fix the system now, 

to make promises that can be sustained so that when other 

legitimate needs of the future press, we won't need to pit 

one generation against another to protect the elderly at the 

expense of the young. I believe we can do better, we must 

do better, and personal accounts play a role in that reform. 

 Thank you, sir.

CHAIRMAN MOYNIHAN: We thank you. It is new to me 

to encounter baby boomers insisting that they take 

responsibility. But that's ensuring indeed. Fidel.

MR. VARGAS: Good morning, Chairman Moynihan, 

Chairman Parsons, and fellow commission members. And my 

brief comments are that I am excited to be here, grateful 

for the opportunity that we have been afforded to continue 
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our work, and to continue to move forward.

We have a lot of work today, and I am looking 

forward to that. I also would just amend my comments by 

adding the comments of Leanne and Olivia, and I'm sure the 

majority of members. But my point is I am looking forward 

to the work that we have to do today, and looking forward to 

pushing ahead and coming up with what we were charged to do 

within a few short months. Thank you.

CHAIRMAN MOYNIHAN: Thank you, sir. Jay Parsky.

MR. PARSKY: Thank you, co-chairman, and it is a 

pleasure to be here. First of all, I would like to 

associate myself with both Leanne's comments and Olivia's 

comments, and I won't try to repeat them. I think they were 

very good. The only general comments I would make are that 

as we now try to come together and put forward some 

recommendations, I think that we should maintain kind of an 

outlook of some general objectives that we have, what we are 

seeking to do, and perhaps what we are not seeking to do.

I think one of our objectives is to try to 

strengthen our social security system. We are not here to 

destroy it. We are not here to privatize the system. We 

are here to put it on a road to sustainability. So, what is 

deemed to be, or thought to be a promise can be a reality.

And part of that, I strongly believe, is 

increasing the ability for individuals to have a choice. 
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The concept of providing within the social security system, 

 choice, I think is an important concept.

And the establishment of personal accounts, and 

the ability to voluntarily choose a personal account, I 

think is an important principle, and one in which, 

certainly, from my perspective, is one of the main reasons 

that I wanted to try to participate in this.

I think as we look at it, I would just emphasize 

that not only is it a choice, but it needs to be voluntary; 

that an element of personal control over that choice I think 

is very important as we move forward. And people that do 

not want to choose a personal account ought to be free not 

to. And we ought to, as much as possible, be able to 

outline and detail what it means if they do choose to have a 

personal account.

The final point I would make is I feel quite 

strongly that if someone selects a personal account, that 

the government is not the appropriate body to be investing 

those funds; that to the maximum extent possible, we should 

assist the system in not being politicized. The more the 

government is involved, the more the potential is for 

politicizing the investment process.

Just from a personal standpoint, I have had an 

opportunity to sit on the Board of Regents for the 

University of California. And I have watched, both in the 
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public pension fund system within California, and even for 

the University, efforts on the part of some government 

officials to make investment decisions that are more 

involved in politics than they are in what I would call 

sound investment -- on a sound investment basis.

I think that is a danger. So, I would be a very 

strong advocate of making sure that part of our choice, 

which people can select or not, is that they maintain a 

stake in their own future. They have a stake in their own 

retirement, and they can choose how those funds are to be 

invested.

CHAIRMAN MOYNIHAN: I see my distinguished cochairmen much agreeing. Of course, we did hear testimony 

from the director of the Thrift Savings Plan and of TIAACREF, and they managed to do what you insist on. But, of 

course, you come from California and we cannot explain 

things.

MR. PARSKY: Well, I am not quite sure I can 

explain all of California either, Co-chairman. But, and at 

times, we may be ahead of the curve, but in this arena I 

think we should be quite cautious.

CHAIRMAN MOYNIHAN: Well, and, John Cogan, do you 

want to testify to that matter?

DR. COGAN: More often than not, we are around the 

bend. Thank you, Mr. Chairman. It is a pleasure to be 
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here. I would like to use this opportunity to state why I 

think personal accounts represent sound policy. The bottom 

line is that there are two reasons: One, personal accounts 

are good for American workers; and, second, personal 

accounts are good for social security.

Personal accounts provide workers within the 

framework of social security with a safe and a sound 

opportunity to build financial wealth and financial security 

in retirement. That everybody knows. But the benefits to 

workers of personal accounts extend far beyond purely 

financial considerations. Workers would own their personal 

accounts.

And, as every American knows, with ownership comes 

security, and with ownership comes greater freedom. 

Retirement income derived from real financial assets that an 

individual owns are far more secure than income that is 

derived or based upon unfunded promises by politicians.

Ownership of personal accounts provides 

individuals with greater freedom; gives freedom to workers 

to choose when they want to retire; gives greater freedom to 

workers to choose the economic lifestyle they wish to 

pursue; and it gives workers much greater freedom to pass 

wealth on to their children.

Social security is a universal program, so every 

worker would have an opportunity to gain value, security, 
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and freedom with personal accounts. But those that would 

benefit most are young persons, and persons who today lack 

the resources to provide for their own financial security, 

primarily low income people.

Social security is headed for significant 

financial trouble, as we all know, and I believe that 

personal accounts would be good for the financial health of 

the program. Experience has taught us that a sound 

retirement program is based on investment.

In its current form, social security is not an 

investment program. It's an income transfer program. Now, 

there is widespread belief that social security will be 

strengthened by giving it an investment component, but 

government investment is not the answer.

It is dangerous to a free economy. It is also a 

reality that in the countries that have tried it, it hasn't 

worked. As we heard from the World Bank, countries that 

have centralized government investment returns have actually 

been negative.

Experience also teaches us that private personal 

accounts will work to strengthen social security. Nearly 

two dozen countries have embraced personal accounts. 

They're working. They have worked for federal workers, 

federal employees, and they strengthen the civil service 

retirement system.
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And, as we have heard, they have strengthened the 

retirement systems for municipal workers in San Diego and 

Galveston. We hear that young people lack confidence in 

social security. As we move through time, the confidence 

that people have in social security is eroding.

The reason that it is eroding is because over time 

the program has provided less value and less security. 

Personal accounts by providing social security with greater 

value and greater security will end up restoring young 

people's confidence in the social security program. That is 

why I support a personal account system. Thank you, Mr. 

Chairman.

CHAIRMAN MOYNIHAN: Thank you, sir. And Sam.

MR. BEARD: Both our chairmen, welcome, and thank 

you, and to everybody out here, welcome. I look at social 

security reform as a non-partisan issue. And I was proud in 

1996 through 2000 to be working the Clinton Administration 

to seek to reform social security, and thrust was to add 

individual accounts.

I am now thrilled to have the opportunity of 

working on President Bush's commission to seek to do the 

same thing. People of good will on both sides of the aisle 

need to figure out a way to do this. I think it is 

especially true after 9-11, but we need leadership. It 

needs to be bipartisan, both abroad and at home.
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On our current course with social security, if you 

go into multiple levels of either tax increase or cutting 

benefits, you can absolutely harm the future economic 

economy, and we cannot do that. Now, there are going to be 

some hard choices, but we need to do them all together.

We have got to go beyond pandering and sort of 

demagoguery. Now, I have here a letter -- I am a Democrat. 

 Here is a letter sent by the chairman of the Democratic 

Party. As you read this letter, he says, "To all 

Democrats," that's me. "George Bush and his advisors are 

preparing to introduce their plan to put social security 

funds in the stock market. We are fighting to defeat the 

president's plan to invest part of social security in the 

stock market."

It is really embarrassing demagoguery. That is 

what President Clinton was trying to do. That is what 

President Bush is trying to do. All of us, as Americans, we 

know social security faces serious troubles.

Now, what is interesting is President Clinton's 

Social Security Advisory Council of 1994 and 1996, total 

range, women's groups, labor unions, liberal left, 

minorities, centrists, business interests, every member of 

that panel agreed you have to have the extra rate of return 

from the private sector. That was the one thing they all 

agreed on.
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In the debate, there is no longer a question of 

whether to utilize the extra rate of return of the private 

sector. It is a question of how to. The real choice for 

the country is, do you so trust the federal government that 

you want them to invest trillions of dollars, the extra rate 

of return of which we will try to keep the current system as 

solvent as possible? Or, since the money comes out of our 

individual payroll checks, do you want to open up individual 

accounts? That is the choice.

Now, fundamentally, on a bipartisan basis, we need 

to figure out a way to come up with a plan, change the law 

in 2002, or no later than 2003. I agree with Lee. I would 

call on people who disagree with what we might come up with 

here, come up with a very specific plan.

Congressman Matsui sent us a letter saying create 

a plan which is actuarially sound by social security. But 

Congress is the final arbiter, we aren't. I would welcome 

Congressman Matsui, and Roger Hickey, Hans Riemer, come up 

with a plan. Let's all of us come up with a plan, serious 

plan, discuss it, and then pass it 2002, and no later than 

2003.

Now, the last thing is just the vision. As a 

Democrat, I am very excited about opening up the opportunity 

for savings and wealth accumulation to all Americans. When 

I started working with Senator Robert Kennedy and had the 
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privilege of doing that in the 1960's, I was afraid we were 

becoming two separate societies.

I am more afraid today we're becoming two separate 

societies. One of the big divisions is those with financial 

assets and those without. All together on a nonpartisan 

basis, we need to figure out how to open up savings to 

everybody.

CHAIRMAN MOYNIHAN: Well said, sir. I am not 

someone who knows something about the subject. Bob.

MR. JOHNSON: Thank you. Thank you, Mr. Chairman, 

and members of the commission, ladies and gentlemen. Like 

Sam, I am a yellow dog Democrat. I have never given money 

to any Republican in my life, save, Bill Cohen, and he's 

from Maine, so you can understand, and he is a good friend. 

 But I share Sam's opinion completely that to turn this into 

a Democrat versus Republican, liberal versus conservative, 

white versus black issue is demagoguery.

Frankly, when I got on this commission, the word 

went out Bob Johnson has become a Republican. I have made a 

lot of money, but it does not mean I am a Republican. And, 

as Bill Clinton said at the inauguration, if you want to 

live like a Republican, vote like a Democrat, so I am doing 

both.

The point I want to make here is that I got on 

this commission for one reason and one reason only, is 
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because President Bush hit on a point that I totally agree 

upon; that is, the money that goes into social security, or 

the money that goes in to pay taxes really belongs to the 

people. And if the money belongs to the people, they should 

have the right to maximize the return on their money.

And it would seem very simple to me that if the 

government under the present system is only delivering you 

two percent, and you by making an individual decision to 

invest your money in a private account can make more, it 

would just seem a logical exercise of your right to control 

your money in a free market economy to maximize wealth.

That is the fundamental reason I think this 

country is greater than any other country on the face of the 

globe, is that we believe in the free market economy, and 

the free enterprise system, and the right of people to 

benefit from their wealth creation.

And for me, as an African American, this is 

fundamentally the reason why I am here. Because African 

Americans, as a whole, are at a complete disadvantage in 

wealth accumulation because they are not invested in the 

stock market to the level that White Americans are. That 

gap has created a huge difference in the net worth of the 

average African American versus the average White American.

If you take the net worth of the typical African 

American family, it will give you a net worth of probably 
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$30,000. If you take that same net worth of the average 

white family, it is about $300,000, a ten-fold spread. You 

can understand clearly the ramifications of that wealth 

disparity, access to better health care, access to 

education, access to retirement income.

And all of the things that flow from that wealth 

disparity come back to us in other kinds of problems whether 

they are increase in teenage pregnancy, increase in drug 

abuse, increase in single family households, all of these 

things are a part of a pattern of not having access to the 

wealth accumulation that this country can create.

So, I would not be on this commission if it did 

not take as a primary objective the creation of private 

accounts, because private accounts will introduce millions 

of African Americans to the stock market in a way that 

nothing in this country has ever done before.

They will see the benefits of their account 

growing. They will then, in my opinion, if they are smart, 

and I think they are very smart, will then increase their 

savings and investments because they will know that they are 

investing in the growth of their own income. And I think 

that is the fundamental objective of this commission and 

taking that on.

Now, I do have one concern. It is a kernel of a 

concern, in that we are in some way saying that we trust the 
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American people to manage their money in private accounts. 

We are going to give them options. We believe that they 

will understand the value of it. They will recognize the 

benefit of this in enhancing and making social security as 

sustainable.

But, at the same time, we are saying, when you 

accumulate this money in private accounts, your access to it 

is controlled by the government. Now, to me, that smacks as 

a little bit paternalistic and a little bit talking out of 

both sides of your mouth.

I am going to talk about that when we get to 

certain key issues in the proposals. But I want to make it 

clear that I fundamentally believe that private accounts 

will sustain social security; private accounts will enhance 

the wealth creation opportunity for African Americans; and 

private accounts will add value to the overall retirement 

opportunities for all Americans.

But I do believe that you can't say, on one hand, 

that you are a smart investor, but you are not a smart 

person when it comes to making sure that investment is used 

properly for your retirement of what other purposes you 

might choose for. And I hope we will recognize the twin 

goals of control of your investment for private accounts, 

and control of that wealth for your personal need as decided 

by you not the government. Thank you.
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CHAIRMAN MOYNIHAN: Thank you, Bob. And we will 

be getting to just that, among other subjects, when we 

finish our opening round here, in which we are hearing an 

awful lot of agreement. And let's hope we hear it from Gwen 

King, the really only real commissioner around.

MS. KING: Good morning, Mr. Chairman. Good 

morning, Chairman Parsons. I would like to associate myself 

with the likes of Mr. Johnson, everything, except that 

democratic part.

Yesterday, in Wilmington, Delaware, I met Jeanie. 

 Jeanie is a retired restaurant manager, who is on social 

security and living in a senior citizens high-rise in the 

city. And I met Jeanie because she was driving the taxi 

that took me from the station to my destination.

Jeanie began talking about how her social security 

check was inadequate, and so she had to work even after 

retiring. Whereupon, I confessed that I knew a little 

something about social security. And she told me that she 

was not so much concerned for herself, she was more 

concerned for her 50-year-old daughter, because she really 

did not think social security was going to be there for her 

daughter when she retired.

I let her know that there was a group of very 

valiant and intelligent people called the President's 

Commission to Strengthen Social Security working hard on 
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this issue; and that we were going to go about the business 

of making sure that this program was going to be there not 

only for her daughter, but for the millions of other people 

who are going to need it in the future.

So, I think, Mr. Chairman, the most important 

contribution I can make at this time would be to shut up, 

and let's get through these opening statements, and get on 

with the work that we had to do, because time is short and 

our work is very, very important to people like Jeanie and 

others who rely so heavily on this program. Thank you.

CHAIRMAN MOYNIHAN: Well said. And, indeed, we 

are closing in on decision points, and we would be making 

some this morning. Bill Frenzel, I think, is of that view.

MR. FRENZEL: Thank you, Mr. Chairman Moynihan, 

and Mr. Chairman Parsons. I want to begin by saying that my 

neighbor to my right, who made some money and did not become 

a Republican disturbs me, I want to know where we went 

wrong. Perhaps, I am the balance. I did not do very well, 

but I stayed Republican.

Mr. Chairman, I think that all of the speakers so 

far, and all of us jointly are demonstrating the fact that 

we believe that we have the responsibility to make serious 

recommendations to improve a program in which we all very 

strongly believe can be improved.

And I think we pretty firmly believe that standing 
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back of leaving the status quo is not a way to fulfill the 

charge that has been laid upon us. It is true that all of 

us seem to favor person retirement accounts. And if that is 

what comes out, so be it.

But I think it is also true that I have not talked 

to any member who is interested in destroying or even 

harming a hair of social security's head. And we have had a 

number of our meetings and ourselves criticized on that 

point.

But it seems to me everyone here is serious minded 

and spending a lot of their own time and resources to try to 

produce the kind of report that we can be proud of, and that 

will carry the nation forward a bit on its social security 

program.

Some decisions need to be made promptly. We have 

been through that before. We have talked about the 

difficulties that occur first in 2016, and later in the mid-

'30s. Some decisions need to be deferred probably, because 

we need to see how the system reacts to the initial changes 

that we suggest if in fact our suggestions are accepted.

And one of the caveats that I would like to lay 

out this morning is that we have an awful long way to go 

before any changes are going to be made in the system. We 

are not much of an event in a very long process that began 

two-thirds of a century ago. We are going to make a 
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recommendation --

CHAIRMAN MOYNIHAN: Bill, could I say, you are 

talking about the larger social security system?

MR. FRENZEL: I am talking about the larger social

security, Mr. Chairman. And we are going to make some 

recommendations which we think will be useful to make that 

program better, but those recommendations go to a chief 

executive, ultimately, go to the Congress, and there are 

lots and lots of hurdles so that we do not need to be 

dilute, but we are writing law here, or that what we do is 

going to actually effect change.

On the other hand, we also ought to be proud of 

our responsibilities, in that what we do can be very 

important. If our report is right, people will be effected 

by it. It will begin a national debate which may in fact 

lead to improvement in social security.

And for that reason, I would like to suggest, just 

for a moment, that some time in our considerations we need 

to take into account the possibilities and probabilities for 

actually making those changes. We do not want, in my 

opinion, to produce a technically perfect plan that is going 

to be indignantly rejected by all of the policy makers of 

the future.

And we do need to make certain that the plan is 

one that is workable, can be acceptable, and can be sold at 
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least to a majority of the American people. I think this 

commission has the ability to perform in that way, and I 

expect it to do so. Thank you, Mr. Chairman.

CHAIRMAN MOYNIHAN: Thank you, Bill. And Bob 

Pozen.

MR. POZEN: Thank you very much, Mr. Chairman. I 

just would like to review three quick points about my, I 

guess I would say, focused support for personal accounts. 

The first is that I believe that we have a long-term 

financing problem in social security that grows out of 

certain demographics, and that the events of September 11th 

have now accentuated that problem to the extent that people 

believed that there was a "lock box" that was going to save 

us. I guess that fiction is now down the table, and it is 

probably good. So, now we realize that we won't be saved by 

the lock box.

The second point is that this is a very difficult 

problem. I think all of us on the commission, who have 

struggled with the numbers have realized that there is no 

easy solution, that there is no magic bullet. If there was, 

I can assure you we would have figured it out, if not other 

people.

And so, when you approach this you ultimately have 

to figure out how you can have some constraint on the future 

growth of the divine benefit portion of social security, and 
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try to do that in a way that will help the lower income 

groups. And, as I think Olivia said, right now we don't 

have a minimum benefit for social security. That is surely 

one thing that we could do.

But for those who say, "Oh, we can just solve this 

problem by modest changes," I don't think they run the 

numbers. If there were modest changes that could solve the 

problem, we would have done those modest changes. In fact, 

these are difficult changes.

And once you realize that there have to be some 

slow down in the growth of benefits, the attraction of 

personal accounts is that it gives people who want to a 

chance to get back some, if not all of those benefits, maybe 

even a little more, and to put them in a better situation, 

and to me that is the real attraction of personal accounts. 

 If you realize that there have to be some painful choices 

here, it gives people a chance to come back in.

The third thing that we hear all of the time is 

that these personal accounts would be much too risk, and 

they would be much too costly. I think we have heard a lot 

of testimony from the thrift plan, and from other types of 

people to say that we can do this. And I think we are 

convinced that we can start off doing this at a relatively 

low cost.

And for those who think, well, this is just going 
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to be a way in which people are going to throw away their 

money, I think there is a consensus that we will not be 

allowing people the full range of investments that are in, 

say, IRAs where people can put their money in an individual 

stock, in an individual country.

What we are talking about is a relatively modest 

set of diversified pools which really have relatively low 

risk. And for those people who say, "Look, I am not even 

sure among these four or five diversified pools what I can 

do, I am not knowledgeable enough," we are going to have a 

default option that is going to be something like a 

conservative balanced funds that will provide them with the 

comfort that if they really feel they do not know what they 

are doing, here is something that will provide them with a 

reasonable balanced approach, one that should get them a 

reasonable return.

So, in short, I think that personal accounts if 

structured within this context can be very useful, and we 

can come up with a system that is administratively 

efficient, and while not perfect, will have diversified 

pools, and the sorts of choices for people that will fit all 

different levels of investors sophistication. Thank you.

CHAIRMAN MOYNIHAN: Bob, I thank you. And you 

won't mind me suggesting that we might find another term for 

the default option.
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MR. POZEN: Okay. I definitely yield to the 

chairman on that.

CHAIRMAN MOYNIHAN: Estelle.

DR. JAMES: Well, 20 countries have already 

adopted personal accounts around the world. So, this idea 

that we are talking about is not a completely new and 

untried idea. In these countries that have adopted personal 

accounts, the adoption of the new system has usually been 

preceded by a very intense discussion period of debate and a 

period of consensus building.

So, during the past year, I have been traveling 

around the United States speaking to many different people 

about social security. And I have begun to take stock of 

the points of agreement and the points of disagreement. 

Because if we are going to move forward, we also have to 

build a consensus.

I would like to take this time to just very 

briefly summarize many points of agreement. I think there 

are many points of agreement on all sides of aisle, and all 

sides of this issue. And I would also like to summarize two 

major points of disagreement that I think we have to debate 

and resolve in order to move forward.

The points of agreement: First of all, everyone 

agrees that, in principle, it is desirable to make the 

system financially stable and solvent for the long run. In 
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principle, no one can disagree with that, and everyone --

there is general agreement to that premise.

We know that when the baby boomers begin to 

retire, expenditures will begin to exceed revenues, and we 

know that by 2038, the expected revenues will cover only 

72 percent of the promised benefits.

Now, that is not a very secure system. If you do 

not have a solvent system with revenues covering 

expenditures, you know that that is not going to provide old 

age security, and everyone agrees we do something about 

that.

Now, point number two: It would be desirable in 

changing the system to change it in ways that improve output 

and productivity in the economy. This is particularly 

important as there are more older people who may not be 

working. We need greater productivity to maintain 

consumption levels, both for the older retirees, as well as 

for the workers.

Point number three: I think there is general 

agreement that improved protection for low earners would be 

beneficial, and you heard several people make comments about 

that in the past hour.

Point number four: Gradual change would be better 

than sudden change. No one wants to have the rug pulled out 

from under them just as they are about to retire. And the 
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sooner we begin, the more degrees of freedom we have, the 

more time people have to adjust to whatever changes are 

coming down the road. So, again, I do not think you will 

find people to take issue with that.

Point number five: Prefunding. Some building up 

of a fund to cover some of our pension obligations is 

desirable. It is desirable for a number of reasons:

• First of all, your system is more secure. If 

you have assets covering your liabilities, there is 

something there to meet those liabilities.

• And, second of all, from the economy-wide point 

of view, this helps build national saving which will 

increase productivity and outcome.

And, finally, the sixth point of agreement: If 

personal accounts are included, they should be only part of 

the total social security system, and they should be carried 

out in a way that keeps costs and risks low. Bob Pozen just 

spoke about that, as did some of the other commissioners.

So, I think, you know, people around the country 

could agree on those six general points. However, there are 

two major points of disagreement that I think we need to 

come to grips with, and we need to debate publicly, and 

decide how we are going to resolve them.

Now, the first point of disagreement is, how do 

you manage the funds?
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If you are going to prefund that means you are 

going to accumulate funds, and someone has to manage them 

during the period when they are being accumulated. And the 

big issue is should they be managed publicly or privately? 

Which way is best for the social security system? And which 

way is best for the economy as a whole?

And I think this is a point in which different 

people will give different answers. The argument for a 

personal account basically stems from a belief that private 

management is better than public management. Now, in other 

countries that I have worked in that have accumulated 

pension reserves, when those reserves had been publicly 

managed, we have generally seen very poor results.

We have seen politically motivate investments that 

lead to low rates of return, often even negative real rates 

of return that lead to a bad, wasteful allocation of capital 

that does not enhance the productivity of the economy, and 

leads to excessive investment and government bonds that may 

increase national deficit which is also bad for the economy.

So, those are some of the outcomes that we see 

around the world when public management has been used. In 

the U.S., we have better governance, better trusteeship laws 

than many of these other countries have, but we also have 

pressure groups.

We have intense lobbying; we have campaign 
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contributions playing an important role. And my fear is 

that the allocation of capital will become politicized if we 

have public management of large pension funds. And this is 

a major rationale for private ownership, private control of 

those funds.

Now, as I said, I know that there are many people 

who take issue with this point of view. I think it is very 

important for us as a society to debate this issue and 

decide where we stand.

Do we want public or private management of the 

pension funds that many of us agree should be accumulated to 

back social security?

I think that public management would be bad for 

the system, bad for the economy, and bad for the government. 

 And that is one of the reasons why I strongly favor 

personal accounts where workers control the funds.

Now, the second major point of disagreement has to 

do with how we deal with the solvency issue. As I said at 

the beginning, most people, in principle, would support the 

idea that solvency is important, and it is important to make 

gradual changes that restore solvency to the system.

However, there is a great deal of disagreement 

about the specifics of how you do this, and even about the 

willingness to pay specific, as Lee mentioned in her very 

first remarks. When you have a 30 percent gap between 
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revenues and projected expenditures, the specifics are bound 

to be difficult. They are bound to be painful.

Any specific method that you may consider to close 

that gap is likely to hurt someone, and therefore to be 

painful and people like to avoid pain. Now, I think 

personal accounts help to close that gap in a constructive 

-- in one of the easiest ways.

But, nevertheless, any plan to restore solvency is 

going to be difficult and painful. And all of us who have 

grappled with the numbers, as Bob Pozen said, realize that 

it is very easy to attack someone else's plan, but it is 

much more difficult to come up with your own plan because 

any plan involves difficult decisions and some pain.

Now, I hope that next month when we meet and we 

discuss plans for achieving solvency, we open the door to a 

construction discussion among all parties on this topic. 

And I hope that people who do not like the plans that we 

propose will come up with their own plan, so as a society we 

can debate the pros and cons of specific plans and move 

forward toward a stronger system.

CHAIRMAN MOYNIHAN: Thank you, Estelle. And, now, 

Mario, and you are at your end.

MR. RODRIGUEZ: Thank you, Senator. I just have a 

couple of points I would like to make. First of all, near 

retirees and retirees do not be scared. You have absolutely 
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nothing to worry about. The system is fine for you. You do 

not have to worry. Your benefits are not going to be cut. 

Everything will stay the same. Do not let people scare you, 

the papers scare you, the rhetoric scare you. It can be 

stopped right now. You have nothing to worry about.

One of the concerns I have is I am very, very 

concerned about -- this is about helping people that need to 

be helped, in particular, the minority community. It is 

alarming to me to hear that Hispanics have $1200 put away 

for their retirement. That is a shame. That is something 

we have to absolutely do something about. The African 

Americans, $3,000 put away.

We have to do something to help the people that 

need to be helped. And that is what this commission is all 

about. And being on this commission with all of the 

individuals, I cannot tell you how proud I am of everybody 

here, and the commitment that everybody here is making, and 

that the president is taking the bold steps to allow us to 

debate this and come up with something to help the American 

people. Thank you.

CHAIRMAN MOYNIHAN: Thank you, Mario. And I want 

to repeat what you have to say about the quality of our 

members. But there is one -- we might as well be open about 

it. Every time I call Tom Saving, his secretary tells me he 

has gone fishing. And it may be he finds he does a lot of 
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deep thinking out on the ranch, or maybe his secretary does 

not want me to know where he is. But if you want to help us 

on that, Tom, you wrap up for the morning.

DR. SAVING: Thank you, Senator Moynihan. That is 

a wonderful introduction to the person who gets to be last. 

 And the advantage of being last is that everyone presumably 

has said the important things that have to be said, and then 

you can be brief. And, presumably, if we are as successful 

here as I am with fishing, we will an excellent outcome, 

assuming I actually get to do any of this fishing that we 

talk about.

Anyway, this commission is about social security 

and I think the operative word of that is security. And I 

would modify this operative word with the word "individual" 

security, because this is about individual security. 

Everyone in the aggregate might worry about retirement 

security, but each individual is worried about their 

individual security.

And we are about individual security, because 

after all each of us is an individual. And the only 

security you have for your retirement, if your retirement 

will be there because of the way this system is imbalanced, 

is if you have an account of your own that is in your name, 

and where you, and not your Congressman, has the one and 

only key, and I think that is important.
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No matter how well meaning our Senators and 

Congressional members are, they legally cannot write a 

social security lock box contract that binds themselves or 

any future members of Congress. I want to say the personal 

accounts represent the only way Congress can put social 

security tax revenues into a lock box.

And I think that is the simplest way to talk about 

this issue, and to say that what we want to do is to put the 

security back in social security. And the way to do that is 

to take the key away from our Congressional members. As 

well meaning as they all are, they are pressed always with 

current events. And, unfortunately, social security is 

about the future. And someone has to worry about the 

future, and we can do that with individual accounts. Thank 

you.

CHAIRMAN MOYNIHAN: Thank you, sir. And just 

before we go now, ahead of time, which is a good sign, to 

our first substantive discussion of the administration of 

personal accounts, to make two points that we have only two 

meetings left. This is not a three year hitch. The 

president in the outset asked us to have our last report by 

our last meeting December 11. And if our report comes a 

week later that will be no matter, but we finish up this 

year.

As you all know, he wants to raise this subject in 
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the State of the Union message, and would be receptive to 

everything he has heard this morning. But we have to know 

that the time is at hand to make some decisions about what 

we propose.

II. ADMINISTRATION OF PERSONAL ACCOUNTS

CHAIRMAN MOYNIHAN: Now, our next subject is the 

Administration of Personal Accounts. And I am going to, 

first -- my God, he has disappeared. If Steve Goss has 

disappeared, we are in trouble. Steve, where are you?

MR. : He is close.

CHAIRMAN MOYNIHAN: Steve, get back, so we know if 

we say something absolutely awful, you can you know keel 

over. It is an honor to have you here. And everyone should 

know that if there is such a thing as double time and triple 

time, Steve has put it in for us without a moment's 

hesitation. 

to you and to your colleagues.

I would also like very much to thank the Treasury 

Department's Office of Tax Policy, with regard to the help 

they have given us on this subject, and the document which 

would be yours to date. John Cogan and others pointed out 

that two dozen countries in the world have introduced 

individual accounts.

It is an idea that you can see developing in the 

way that social insurance itself developed. And it does not 
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happen in a week, but you can feel it coming. In this 

overview of Treasury work on administrative issues of social 

security personal accounts says the summary, "This document 

provides an overview of work performed from 1998 to 2001 by 

the Treasury Department's Office of Tax Policy, introduction 

in the fall of 1997. The Clinton Administration began to 

analyze proposals to create a system of individual 

retirement accounts either as part of the social security 

program or outside it."

And, Sam, I think you indicated that you had been 

involved in some of that thinking. Here it is. And the 

nice part of it, they cite that paper by Elmendorf, Liebman, 

and Wilcox, which was given up at Cambridge earlier last 

summer, and which we had at I guess our first meeting.

The good news is -- well, the good news is right 

here. It can be done. It works. They have figure out it, 

figured it all out. And for three basis points, it is one 

of those things that I am not sure I fully understand. It 

is all right.

They were down to the number of keystrokes it 

would take, and the answer is that there are enough 

keystrokes. I do not know where you store a keystroke. 

Well, I am, you know, liberal arts, that kind of thing, 

forgive me.

And then, something else of consequence in the 
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previous administration was planning this. They had a 

succession of plans, what was the USA account, and so forth. 

 Then in the year 2000 election, both candidates of the 

major parties proposed one form or another of individual 

accounts.

Vice President Gore was, perhaps, more specific 

than any of the candidates. And there were, as we know, 

more than two. NPR, all things considered, June 20, Vice 

President Al Gore outlines a new plan designed to help lowand middle-income Americans, Bob, Robert.

And it says, "Savings accounts can let your 

parents build a haven on the bed rock of social security. 

So they cannot only make ends meet, but also live to old age 

of peace and plenty. If a young couple saved just $20 a 

week, they could reasonable expect to save as much as 

$400,000 extra by the time they retire 35 years later."

The magic compound interest, I know that word 

because --- about as much as I get to, but all candidates 

were there. Other countries, I have got there before us. I 

guess Bismarck had an old age retirement in place by 1888, 

and we were a half century later.

President Roosevelt's message to the Congress on 

social security, all three-and-a-half pages, in those brief 

days when they got things directly, began of course with 

unemployment insurance which was the pressing issue in 1934 
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-- well, '35 message, and then went to old age retirement.

As I mentioned he had -- he said that the old age 

retirement should be associated with personal annuities. He 

anticipated something like we are doing here, and that he 

called for unemployment insurance.

Well, the British adopted this in 1911, the 

liberal government. Churchill, as Home Secretary, proposed 

it. The Torrie benches opposite said that if you do this, 

the workers will spend the money on drink. And he said it 

is their money, and which was a good liberal proposal in 

those days, but we won't get into that detour.

But we will begin, if you are ready, Chuck 

Blahous, and Kent, who has done so much work for us in these 

matters. And I think we will now turn to Section II, 

Administration of Personal Accounts.

MR. : I don't like that idea, but 

absolutely.

CHAIRMAN MOYNIHAN: Yes, sir. Very well, I think 

the way we go is that, Kent, you have prepared some talking 

points and questions for us. And with the permission of the 

commission, I would like to ask if Chuck Blahous, our 

indefatigable Chief of Staff might want to say something at 

this point, Your Honorable Self, and Kent Smetters.

MR. BLAHOUS: Thank you, Mr. Chairman. As you 

have pointed out, I am joined at the table by Steve Goss, on 
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my right. We will try to heed your admonition to leave him 

undisturbed during the December holidays by completing our 

work.

And on my left, by Kent Smetters, who, as you 

alluded to, has performed a tremendous amount of work with 

the Treasury Department in outlining the distinguished 

pedigree of personal account administration.

I would like to, if I may, simply summarize some 

of the fact-finding that has been done by the administrative 

subgroup, and then allow Kent to make a brief summary of the 

work that was begun under the Clinton Administration to 

administer personal accounts.

CHAIRMAN MOYNIHAN: Please do.

MR. BLAHOUS: During the past several months, Mr. 

Chairman, the administrative subgroup for the President's 

Commission to Strengthen Social Security has worked closely 

with nonpartisan experts in the executive branch departments 

in order to outline options for the best design of personal 

accounts. These experts have investigated the 

administrative aspects of personal retirement savings 

accounts dating back --

CHAIRMAN MOYNIHAN: Might I just interject to say 

that in that report that has been prepared for us, the 

Treasury turned to -- have I got it right -- First Boston 

for Counsel and --
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DR. MITCHELL: State Street I think.

CHAIRMAN MOYNIHAN: State Street, State Street, 

sorry. And then, this new name for Arthur Andersen which 

is?

DR. MITCHELL: Accenture.

CHAIRMAN MOYNIHAN: Accenture. Thank golly you 

are here, Olivia. But, I mean, so we have reserves not just 

in Washington, but they are up in State Street in Accenture. 

 They are authorities as well.

MR. BLAHOUS: Yes, sir.

CHAIRMAN MOYNIHAN: Excuse me. I just want to 

make that point.

MR. BLAHOUS: Indeed, this work dates back to 

previous administrations and made use of experts, both 

inside and outside of the government. The motivating 

question of the review of the administrative subgroup is 

whether personal accounts can be implemented in a costeffective manner, and give Americans a good value for the 

services they receive.

While not all details of this analysis have yet 

been finalized, it is already very clear that the answer to 

this general question is positive. Personal accounts can be 

administered in an efficient and effective manner. The 

international experience has also confirmed this conclusion 

regarding personal accounts.
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More than 20 countries spanning five continents 

have now created personal accounts to either augment or 

replace their public pension systems, as some have alluded 

to here. Personal accounts have been created in Australia, 

Switzerland, and the UK. They have also been implemented in 

Chile, Mexico, Argentina, and Poland.

Numerous other countries are also now in the 

process of creating personal accounts including both Russia 

and China. Even Sweden, a nation that traditionally has a 

large amount of publicly provided welfare, has also recently 

implemented personal accounts. Experience in the United 

States --

CHAIRMAN MOYNIHAN: Might I interject just to say 

that the Swedish experience has not been a very happy one, 

has it not?

They began by offering individuals 565 options, 

and not including the default option, and even Swedes got 

confused. This is not a risk-free enterprise. Am I wrong 

about that, Kent?

MR. SMETTERS: No, you are right. It just 

emphasizes the importance of the default option in all of 

this.

MR. BLAHOUS: The standard option.

CHAIRMAN MOYNIHAN: Called the orange option, but 

there are 565 choices.
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MR. SMETTERS: Yes, there is quite a few. It is 

growing every day.

CHAIRMAN MOYNIHAN: And just too many.

MR. BLAHOUS: Experience in the United States, Mr. 

Chairman, with 401(k) plans and investment retirement 

accounts has given the U.S. financial providers a tremendous 

amount of experience in administering personal accounts. 

But by any measure the United States, a country whose 

approach to social security was copied throughout the world 

in the 20th Century, is now behind in terms of modernizing 

our system for the 21st Century.

Both the international experience and the 

subgroups own examinations have provided two valuable 

lessons. First, personal accounts can indeed be 

administered in a cost effective fashion. But, second, as 

you just indicated, Mr. Chairman, the design details are 

very important.

The UK system, for example, has been criticized 

for high cost and accounts earning, and the government there 

has had to re-reform this system in order to solve these 

problems. Moreover, many of the basic design choices 

involve difficult value-based decisions.

For example, how to divide assets in the occasion 

of divorce. And these cannot be settled by economists and 

actuaries alone, with apologies to our actuaries at the 
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table. Instead, these issues -- and our economists around 

the room, yes.

Instead, these issues have to be discussed and 

debated thoughtfully in a public setting, as we are about to 

do. And this fact motivates today's discussion on the 

administrative aspects of personal accounts.

Before I turn the microphone over the Kent, I want 

to say a few words about these general principles that have 

undergirded the administrative subgroups investigations thus 

far:

(1) Administrative fees must be reasonable. Any 

fees must be in proportion to the services that are provided 

to the owners of personal accounts.

(2) Real assets, as much as possible, are the 

foundation of retirement security, and personal accounts 

must be designed with this retirement security in mind, and 

a number of commissioners today have talked about what are 

the components of real retirement security.

(3) Widows and widowers, too, often fail to live 

in financial security during retirement. Personal account 

ownership must help with providing protection, additional 

protection to survivors.

(4) Divorce too often spells the beginning of 

financial insecurity for spouses with a limited work 

history. Personal account ownership must help provide 
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former spouses better protection relative to the existing 

social security system.

(5) People with below average life expectancies 

are being forced too much to contribute during their working 

years exclusively to a retirement system from which they 

will receive few benefits upon retirement.

CHAIRMAN MOYNIHAN: Now, sir, you are not speaking 

of individuals, but of social group beings?

MR. BLAHOUS: Indeed, Mr. Chairman. If you have a 

demographic group for a classification where individuals are 

less likely to live well into their retirement years, the 

unfortunate fact for many of these people is that they spend 

a good portion of their lives putting taxes into the system, 

and neither they nor their heirs receive much out of it due 

to their shorter lifetimes.

CHAIRMAN MOYNIHAN: Due to simply an actuarial 

reality for this group, as against a destiny for an 

individual?

MR. BLAHOUS: You are correct. That's right.

(6) The fact that, at most, only half of U.S. 

households currently own a meaningful level of financial 

assets is unacceptable. A system with personal accounts 

must be constructed in a manner to help all Americans to 

materially share in the dream of financial security upon 

retirement.
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(7) Financial education and information must be 

provided to Americans in order to encourage them to save the 

resources that they need to retire in dignity. Personal 

accounts must, therefore, be implemented with this education 

in mind.

(8) Protection must also be provided to those who 

are unable or unwilling to make investment choices by 

implementing a set of reasonable -- and it says here in my 

text, "default choices." I will correct that for the 

record.

CHAIRMAN MOYNIHAN: Can we agree the "x" choice?

MR. BLAHOUS: For the moment, the "x" choice.

(9) Every personal account owner is entitled to 

have his or her contributions credited to his or her account 

in a timely and accurate fashion, but without imposing large 

compliance costs on large or small employers.

(10) The government must be diligent in ensuring 

that any personal account system is operating efficiently 

and fairly.

And, Mr. Chairman, as you indicated in your 

opening remarks, we have already done, as the previous 

administration has already done, substantial work to ensure 

that these objectives are met. And with your permission, we 

will allow Kent Smetters to review a bit of the work that 

was conducted under the Clinton Administration.
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CHAIRMAN MOYNIHAN: Please do. Is that agreeable 

to the commission? We are right on schedule. Kent 

Smetters.

MR. SMETTERS: Thank you, Mr. Chairman. In the 

fall of 1997, the Clinton Administration began to analyze 

proposals to create a system of individual retirement 

accounts, either as part of social security, or outside of 

it. By early 1998, working groups were formed within 

Treasury and other departments to study issues related to 

such proposals.

A primary issue is how a feasible system of 

accounts could be administered, and what would be the 

associated costs. As a result, work was done to estimate 

the range of administrative costs associated with various 

administrative structures. Additional work was done to 

assess the feasibility and cost of using the IRS to process 

individual account data.

In May and June of 1998, Treasury staff undertook 

a study of the potential administrative costs associated 

with government-based, employer-based, and individual-based 

and individual retirement systems. A government-based 

system was assumed to centralize the collection record 

keeping and individual management functions of the system 

within the government provider or a contractor similar to 

the Thrift Savings Plans for federal employees.
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And employer-based system was assumed to require 

an employer role in collecting contributions and managing 

investments similar to a 401(k); and an individual based 

system was assumed to be decentralized in the sense that 

individuals could choose from many competing account 

providers similar to an IRA.

The costs were extrapolated using existing data 

and typical costs of TSP, 401(k), and IRA accounts adjusted 

for any relevant indifference such as the costs of 

nondiscrimination testing from 401(k) fees. By mid-1998, 

various proposals from outside administration had suggested 

using the IRS to collect information on workers individual 

account contributions and investment choices as part of 

their annual filings.

In June, July, and August of 1998, the Treasury 

staff policy had multiple meetings and conversations with 

the IRS staff regarding the feasibility and cost of using 

the IRS to collect individual account paper work.

The feasible and cost study was very detailed 

requiring assumptions such as the number of forms filed on 

paper versus electronically, and the marquis structure 

required to enter taxpayers name, social security number, 

routing, and account numbers.

Let me move on. In January of 1999, as part of 

the development of the Administration's budget, the 
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development of the Universal Savings Accounts began. The 

USA proposal was released in April of 1999, and did not 

include details regarding account administration. And, 

nonetheless, Treasury staff had done a considerable amount 

of work on the USA account administration.

In October of 1999, Treasury's new USA cost 

estimates were generally in the range of about $13 to $15 

per account per year. In the late 1999, early 2000, as was 

alluded to earlier, as part of the Administration's budget 

proposals, the USA proposal was modified to a new proposal 

for individual accounts that became known as Retirement 

Savings Accounts.

During the spring of 2000, Treasury published a 

request for information asking any interested vendor to 

submit qualifications for a competitive bid to design and 

operate an online database similar a system to administer 

RSAs.

In September of 2001, the President's Commission 

to Strengthen Social Security, requested information related 

to administrative costs of a personal account system within 

social security.

In response, Treasury staff utilized their 

administrative cost model for a large individual account 

system based on the information learned from prior contacts 

with State Street Bank industry consultant now called 
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Accenture, as well as Treasury's own work on the USA and RSA 

proposals. The cost estimates provided by Treasury suggest 

a range below $13 per account.

So, the work that we are doing today for the 

commission is really in a continuum of a long history of 

work that has been done from previous administrations, and 

we have constantly modified the process, but enhance it to 

make it always more accurate. But it is part of a long 

history and continuum.

CHAIRMAN MOYNIHAN: Well, thank you very much, Mr. 

Smetters. And you have put together for the commission a 

series of questions. And I think we all have these in front 

of us, do we not? Well, I have the questions, if you have 

the answers.

MR. : You have the questions, we have 

the answers.

CHAIRMAN MOYNIHAN: Where is it? Why don't I 

look? Obviously, there are people on the administrative 

group who have views on this. So, I will read the question, 

then the people involved, or anybody else involved will make 

their question.

(1) Without necessarily deciding the exact 

administrative structure today, which key features of the 

centralized, mixed, or decentralized structures do you 

believe are the most important in any system or personal 
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accounts?

And we have -- Beard and Frenzel seem to be of the 

same view, then Pozen, then James, and Cogan, maybe 

Mitchell.

MR. FRENZEL: Thank you, Mr. Chairman.

CHAIRMAN MOYNIHAN: Sir.

MR. FRENZEL: Thank you, Mr. Chairman. On our 

group, we had a number of discussions on this question. And 

because of the cumbersome nature of how we must deal with 

the question, we of course had no votes. While we tried to 

share information with one another, sometimes in the whole 

group, sometimes one-on-one, it appeared that probably more 

members favored what we will come to call the centralized 

version rather than the other suggestion, or even the 

hybrid.

And the reasons most often stressed by those who 

spoke in favor of the centralized system was that we had a 

very good model which was highly successful and was praised 

by participants and groups alike, and that was in the thrift 

plan of the federal government.

It seemed to work. The players liked it, et 

cetera. And if we are talking about overcoming political 

hurdles in the future, why challenge success? Here is one 

that not only the participants like, but the Congress likes 

as well.
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Item number two, by those who seem to favor it, 

was the cost is obviously less, and I will yield to Treasury 

or anybody else on that score later if they have some good 

figures.

But, again, going back to the thrift plan and 

looking at what they allege their costs are, the significant 

number of basis points could be achieved by the centralized 

plan rather than a more individualized or decentralized 

plan.

Finally, we did discuss other countries' 

experience. Sorry, not quite finally. We did discuss other 

countries' experience, and we noted problems in at least the 

countries that were discussed. Chairman Moynihan has 

already suggested that some of the Swedish problem.

We know that the problem in the UK about allowing 

money managers to solicit people on the streets resulted in 

some extensive situations which I think is wise to avoid. 

And it does seem to me that wherever we look, our own thrift 

plan gave us a better model than those we found overseas.

I think members also considered that there is a 

certain lack of sophistication on the part of probably a 

number of these participants and potential investors at 

least. And even the most sophisticated of us would not know 

how to approach the 500, and then later 700 Swedish choices 

that we had.
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And looking a little further at the British one, 

we noted there was a bit of rapacity, you might say, on the 

part of the money managers, who were anxious to get the 

business at whatever cost, --- the people who favored 

central systems favored it very strongly.

And when it was suggested that, well, maybe you 

need a tier two down the line, in which you should offer 

more choices to people said, "Okay. But let's not slay that 

dragon today." Let's let that happen. If that development 

is to occur, we can express this in our opinion that that 

would be desirable.

But not to stage it, and say that it has to occur 

after year 10, or when your assets get to be "x" dollars, 

rather to say, "Let's see what develops and the board will 

certainly be able to make recommendations, and so will other 

observers."

So, Mr. Chairman, that expresses the point of view 

of the people who thought that system was the best. But it 

is by no means the decision of the administrative, nor may I 

say that there was any vote taken? And it is finally fair 

to say that there were other opinions expressed, and I would 

leave that for others to make at this point.

CHAIRMAN MOYNIHAN: Good. Thank you. So, others?

MR. BEARD: Bill stated the issue very well. And 

one of the objectives we all agreed to is here is an 
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opportunity for all Americans to build well. So, we are all 

very sensitive to the issue of administrative costs. 

Because as administrative costs go up, your wealth 

accumulation is not. So, there is a whole discussion about 

how to open up wealth accumulation and come up with plans to 

keep administrative costs low.

On the issue of choice, on the federal Thrift 

Savings Plan, as we heard when they testified, it is a 

competitive process, and Barkley's International has won. 

So, it is one provider for the country.

And I think that most of our commissioners just in 

the discussion we have heard rather like the idea of having 

some choice; and having more than one provider so that, in 

effect, if you define here are the kinds of limited and 

diverse types of portfolios and systems like the federal 

Thrift Savings Plans, if more than one vendor wants to offer 

those limited choices they may, and then you get more than 

one provider.

So, that is what I will comment. And Bill's 

comments were excellent.

MR. POZEN: Well, I would just like to express 

agreement on certain points, but then just raise a few 

questions. I think I would agree that the collection of the 

money through the government system makes a lot of sense. I 

also think that starting off with a thrift plan with a 
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limited number of choices, low cost alternatives, makes a 

lot of sense.

I guess I would just like there to be an expressed 

recognition. And maybe this is not very different than what 

Bill Frenzel said, that down the road, once we have had 

experience with a thrift plan, and once we understand the 

range of choices that people are interested in, that we at 

least ask the Board that administers the system to try to 

develop a tier two in which you would still have the 

collection through the government, but that maybe people who 

had accounts of a certain size would then be allowed to go 

into a tier two.

I think we would also ask that the tier two not 

just have every possible investment like the Swedish system. 

 But, again, that the tier two be limited to some concept of 

diversified -- a limited number of diversified pools with 

some orange options provided also.

CHAIRMAN MOYNIHAN: Bill.

MR. FRENZEL: Can you sort of describe the range 

of options in the discussion that you had that might be in 

the initial plan?

MR. POZEN: Well, I think in the initial plan, the 

thrift plan has five options. It has a diversified U.S. 

stock fund; it has a diversified U.S. stock fund; it has a 

diversified international fund; it has a bond fund; it has a 
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money market fund; and it has a diversified small-cap fund, 

so that it has that sort of diversified group of --

CHAIRMAN MOYNIHAN: It began, I believe, with 

three.

MR. POZEN: With three, and then it added two.

MR. FRENZEL: We are talking about adding a couple 

of balanced funds.

MR. POZEN: And then, I think we were talking 

about adding a couple of balanced funds for people who 

wanted what I would call a one fund solution. They did not 

want to have to allocate between funds. They just said, 

"Well, I would like either a moderate or a more growthy 

balanced funds, so a more growthy."

One type of balanced funds might be 60 percent 

equity, and 40 percent; and another might be 40 percent 

equity, and 60 percent bonds, so to give them a choice for 

two one fund solutions.

Most of these, as in the thrift plan, I would 

expect to be index funds. But I think we go to a tier two 

that we could contemplate a similar range of diversified 

goals with some similar orange options, and but perhaps 

allow some active management and a little variety in terms 

of approaches.

And I would agree that it would probably take 

several years to get this plan off, you know, develop with 
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all of the systems issues, et cetera, and then we will know 

a lot more after a few years. I would not, as Bill Frenzel, 

I would not put a specific time date on it, but I would like 

to see a general guidance to this Board to try to develop a 

tier two at some point down the road with these constraints.

CHAIRMAN MOYNIHAN: Estelle.

DR. JAMES: I, basically, agree with Bob's point 

of view, and I would just like to quickly summarize how I 

get to that point. It seems to me that because we are so 

concerned about keeping administrative costs low, and also 

keeping risks low for workers who are just beginning to 

learn how investment works, I think a Thrift Savings Plan 

type model is very advantageous for us to start with.

In this kind of model, it has two features that 

enable us to keep costs and risks low. First of all, only a 

limited number of options are chosen. These are very 

broadly diversified investment options. They are indexed 

investment options.

As you know, that is the lowest cost way to go. 

And the provider, the asset manager, is chosen in a 

competitive bidding process, and all of these lead to very 

low administrative costs per account, and also relatively 

low risk because of diversification. So, I think that is 

the way we should get started.

Now, this kind of system also potentially poses 
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some dangers because it is a quite centralized concentrated 

system. The danger that I mentioned in my opening remarks 

about political manipulation, I think could reappear there 

over time; also, the dangers that Sam Beard mentioned of 

monopoly, power, concentration of control over a large 

amount of assets appears, as we know, in the Thrift Savings 

Plan.

One provider manages the portfolios, and I think 

it would be desirable ultimately to have more competition 

from the outside to obviate the dangers, both of political 

manipulation and monopoly power. So that's why I support 

the development of eventually a second tier.

This will take time. I don't think we have to 

spell out the details. I think that is something the Board 

will do in the course of time, as Bill Frenzel said, as we 

learn how the system works.

But I think one thing is very important that tier 

two should also consist of very diversified portfolios, 

again, for risk reasons, and portfolios that are not too 

different from what is in tier one, obviously, not 

identical.

There would be no point in having identical 

portfolios, but not too different, because the more 

differentiation you allow, the greater the danger that costs 

will escalate, that marketing will lead to this outcome.
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So, I think that is something we have to grapple 

with, what we mean by sufficient diversification, and not 

too different. And I do not even have an answer to that at 

that point. I think the board of experts that works in the 

next five years will have hopefully come up with answers.

CHAIRMAN MOYNIHAN: Well, fair enough. It is a 

good thing to know what we do not know. Olivia.

DR. MITCHELL: Thank you. I find myself in 

agreement with a number of the points that have been made. 

I guess I would like to emphasize the points of disagreement 

just to get the discussion open a little bit.

I guess I find a severe conflict of interest 

problem with the notion that the board of a centralized 

government monopoly like the thrift saving plan, as it would 

be amended, there is a conflict between the notion of that 

sort of single unitary money manager, and the notion that it 

might at some future date decide to vote for its own demise, 

or allow competition into its fold.

I think that it would be a reasonable proposition 

to say that some sort of starter plan would involve a TSP 

sort of a model. But you have to build in from the 

beginning the role of privately managed funds, because if 

not it will never happen. It will never come to pass.

I also want to offer some caveats regarding the 

function of the thrift saving plan. We know, for example, 
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that the thrift saving plan has, only recently with great 

energy and pressure behind it, moved to more investment 

options. And it is slowly moving to a more nimble 

investment portfolio and allowing more choices and more 

movement of funds.

But, you know, you could argue that its offerings 

are still fairly limited. And, in fact, I would not have 

gone the direction they went in terms of adding small-cap 

and international, when they do not even have an inflation 

index bond fund which it seems to me is fundamental for the 

range of offerings about to be in a personal account plan.

We also have, of course, a history of social 

targeting of investments in government run accounts. Now, 

the folks in TSP will say they have been fairly successful 

in resisting that pressure, but we have a long history of 

state municipal pension plans that have not resisted that 

pressure. The Navy pension plan, other kinds of pension 

plans have not resisted that pressure. So, I think we have 

to be extremely careful.

My final point is that there are private, low cost 

providers. I am a member of the TIAA-CREF pension plan. 

They are one of the cheapest in the business and give great 

service. Vanguard is another one. There are other 

companies out there that do this very well. I think we 

really need to think carefully about more of a hybrid plan.
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CHAIRMAN MOYNIHAN: Well, I am going to suggest 

that we do not quite have agreement here. We are getting 

close. I mean, I have not heard anything that is just 

incompatible. Can we hope that the administrative group 

might present a decision that we will reach?

I hope we do not have to vote, but that we will 

agree to after discussion at our next meeting. Yes, sir.

MR. FRENZEL: Mr. Chairman, I think that is the 

way the people on our subgroup expected it to go, that our 

staff would pick on the comments that were made today, and 

receive other comments from members who may have them later, 

and give us a write up from which we can later make our 

selection.

CHAIRMAN MOYNIHAN: Present a consensus view.

MR. FRENZEL: However it works out, I think that 

is the right way to proceed. Otherwise, then we would talk 

about each one of these 11 questions all day.

CHAIRMAN MOYNIHAN: Of course. Is that agreeable?

MR. : That's fine.

CHAIRMAN MOYNIHAN: Sure, all right. But there 

are more questions come, and we are on schedule, and you 

will get lunch -- maybe.

The subgroup is investigating the benefits and 

costs, the different possible methods of collecting 

contributions, collecting contributions. An early analysis 
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suggests that a 15-month reconciliation delay in the current 

system would lead to only a very small reduction in 

retirement balances in a personal account system, relative 

to something called real time reconciliation.

How do you feel about these matters? There are 

trade offs. But, obviously, put simply, from the moment a 

deduction is taken from a payroll, to the moment that that 

amount of money is invested in a stock or a bond that 

produces revenue, there is an interval called bookkeeping. 

It is a lot quicker than previously. Do people have a short 

answer to this subject? Well, Fidel.

MR. VARGAS: Again, as Commissioner Frenzel 

alluded to, we have done some work on all of these 

questions, and by no means is our work conclusive. And I 

think what we are doing here today is sharing it with the 

commission as a whole. But on this issue I think there are 

three principles that I look at, that I think are critical.

The first you mentioned which was to minimize the 

time lag between the time that, you know, someone's check is 

debited, and the time that their accounts are credited, or 

maybe the other way around. And apologies to my accounting 

professor at business school. But, and so we want to 

minimize that.

And, secondly, and I think just as important, we 

want to minimize any unreasonable burdens that we may place 
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on employers, because while I would favor real time 

reconciliation that the mechanics of it are quite 

complicated. And so, we want to make sure, especially on 

small businesses, that we do not place any unreasonable 

burdens on them.

And, finally, to maximize the simplicity and to 

facilitate implementation, I think we all want to see 

personal accounts established, the sooner the better, and I 

think those are the three principles. So, while real time 

reconciliation is desirable, it is not I believe currently 

feasible, at least not in light of the principle that I 

outlined above.

So, I think, therefore, I believe that it makes 

sense to utilize a current reconciliation process. However, 

I also believe that we need to explore real time 

reconciliation, the technology required to make it feasible.

And, perhaps, as we are talking about the tier two 

program, we could look into the implementation of a pilot 

project that could establish a test to see what the process 

would work. But, in the meantime, I think it makes sense 

for simplicity, and also for implementation sake, to go with 

the current reconciliation.

CHAIRMAN MOYNIHAN: But you are not quite ready to 

tell us, this is --

MR. VARGAS: No, but I think that that's kind of a 
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-- from our work, I think that's a general overview. And, 

obviously, there are other views. And I am sure that the 

folks that were not participating in our panel would have 

other views as well, but that seems to have been a 

consensus, not a consensus, but a general view that we 

shared, and we wanted to put forward.

CHAIRMAN MOYNIHAN: Good, good. Jerry.

MR. PARSKY: I just wanted to get a clarification 

of what the -- of this 15 month issue. Is that 15 months 

after the funds would actually get into an account? Or is 

it 15 months from the time you make the choice?

Let's just say you made the choice January 1. You 

contribute January 1, '01. Correct me if I'm incorrect, but 

it is 15 months from the time the contribution is not 

already made by the individual until it is actually credited 

in the accounts and considered to be invested in the 

appropriate choice.

DR. MITCHELL: No, because the employee who makes 

a contribution out of his paycheck, 1/1/01, the employer 

might not actually deliver that dollar to the social 

security system until the following year when the taxes are 

sent in. So, it might 15 months or 16 months. From that 

point, it could be another 15 months till the 

reconciliation.

MR. SMETTERS: No, no, no.
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DR. MITCHELL: No?

DR. JAMES: It is like the year 2000, the 

reconciliation of most, it would take place by September 

2001. And in coming up with a 15 months period, we are 

assuming the money has come in throughout the year 2000.

DR. MITCHELL: I am just asking the very simple 

question to the extent, if you put in a dollar January 1st, 

that is, you are contributing that, how long does it take to 

get to the market? What is the longest possible time it 

could take?

MR. SMETTERS: If it was literally January 1st, 

then it would be like 18 months. The 15th is kind of taking 

the average. In other words, you are exactly right. During 

the year of 2001, all of the employers were doing is sending 

in money. But they are not sending enough information to 

actually --

CHAIRMAN MOYNIHAN: They do not give names.

MR. SMETTERS: They do not give names, right, and 

that comes at the end of the year. That would come at the 

end of the year. And it will take another additional five 

or six months for everything to be reconciled to go to the 

personal account, but once it is in the account it is there.

MR. POZEN: Could I answer Jerry? I think it is 

not necessary that the investment choice be made at the time 

of contribution.
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MR. PARSKY: Right.

MR. POZEN: Which may be responsive to your 

question. For instance, if we have a system -- and I think 

all of us would like to see a faster reconciliation.

MR. PARSKY: Right, that is my point.

MR. POZEN: I think everyone would. But let's 

assume that it takes till September of the year after till 

we actually have all of the names, we have the 

reconciliation, we could provide the investment choice 

season to be over the summer so that people would -- if 

between January 1st of this year, and September of next 

year, it would be, say, in a money market deposit account, 

or in something like that.

And then, in the summer of next year, we could 

then provide people the chance to make the choice. We would 

not want them to make the investment choice 15 months or 18 

months, I don't think, before they actually -- the money 

goes in, because by that time lots of things can happen in 

the market.

But I think that your question points up the great 

difficulty that the subgroup has had with the fact that we 

would all like to see a much faster reconciliation. From my 

personal experience in the private sector, I do not think we 

want daily contributions, or perhaps even monthly 

contributions, but it would be nice.
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It would be, and I think, a good goal to try to 

get to quarterly contributions, or at least every six months 

so that we could start to get the system to work faster.

MR. PARSKY: I think really at the heart of what I 

was driving at was really two things. One, At what point 

does a person who made the choice earn money on his money? 

At what point does that happen?

MR. POZEN: I think they start to earn money in 

the day it is deposited, but they are earning money probably 

in some sort of money market rate until it is fully 

reconciled, and then invested.

MR. PARSKY: That is helpful. I mean, at first, I 

thought, well, it was only upon reconciliation that you 

would really get the benefit of the system. And I think 

that if we could avoid that, that would be very helpful.

DR. JAMES: Yes, you get part of the benefit 

before then; that is, you get the money market, right, but 

you do not get the full benefit of a balanced portfolio.

MR. PARSKY: Right, I understand that. And the 

second aspect of it is there is a reference here to, in 

order to shorten this period, there may be higher costs. I 

think it would be helpful to know what that really means. 

You know, what incremental costs would result in shortening 

the period?

MR. POZEN: Well, my understanding is, and Kent 
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may want to address this, that this is part of a more 

general project that the Treasury has undertaken to try to 

shorten the reconciliation time. So, I am not sure what 

their time frame is, or what their objective is here. But I 

think part of this should not be allocated just to this 

system. I mean, I think it is a good idea for the Treasury 

to shorten that time as a general matter.

MR. FRENZEL: I think part of the problem is that 

it is hard to accelerate the contributions, particularly, 

for small employers who are a little bit upset about the 

government bookkeeping they have to do as it is.

CHAIRMAN MOYNIHAN: Could I just reinforce what 

Bill has just said, just the comments you pick up? Small 

employers are anxious about this program. They needn't be 

if we attend to their concerns. But if we act like 

everybody is General Motors, they are not, few are, and 

social security has handled that well, Gwen, and it can be 

done.

MR. POZEN: I think over time one of the other 

things to realize is we are talking about the yearly flow. 

Over time, if you are in the system for 20 years, then most 

of the monies will be in the store, will be in the fund, and 

won't be in the flow.

If you think of it as a one year start up problem, 

then it looks very difficult. But after awhile, you have 
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this big amount of money in the fund, and then you have this 

one year -- then the money that comes in the flow comes in 

relatively slowly. We give you this money market deposit 

account. It would be nice to do it faster, but it is the 

only -- it would be then one year against the 20 year build.

CHAIRMAN MOYNIHAN: Good point. Good point. 

John.

DR. COGAN: Let me thank the subcommittee for the 

work they have done. This really helps me in my thinking 

about how we want to approach this issue.

Bob, you mentioned that during this interregnum, 

where the individuals contribute the money to the 

government, but there has not been a reconciliation, the 

individual would receive a money market return.

My question is: What does the government do with 

the money during that 15- or 18-month period? Have we, as 

the subcommittee, talked about what the government would do 

with that money?

MR. BLAHOUS: Dr. Cogan, this is actually sort of 

a corollary decision point that is related to the one that 

is before you right now. Certainly, there are different 

options before us. We could, as has been suggested here, 

assume that the money is invested in some type of money 

market fund and earning that rate of return.

An alternative idea would be to have it assumed to 
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be invested in the portfolio allocation that the individual 

had in the past; and that you would assume, at least during 

that temporary period, that it had not changed. So, it 

would be sort of a bit of a delay, as it were, in any new 

investment allocations that they were choosing to be 

implemented.

But, again, that is something that is subject to 

your deliberation and decision. But, certainly, however you 

would determine that would determine the answer to your 

question.

DR. COGAN: Right. My general concern is, of 

course, we do not want to end up, because of the 

administrative concern, having the government invest the 

money.

MR. POZEN: I think it would be possible. I think 

that it is a good point, John. And I think that it would be 

possible to hire a private manager to do that during the 

interim. I think the question that we have been struggling 

with is whether there was some way to reasonably have an 

estimate that we could get the money to work faster.

It is not just the question of whether the 

individual, you know, had changed an amount that would do it 

the same. The problem is in many cases we do not know who 

the money -- which individual it is attributed to. Then, if 

the person changes jobs in the middle of the year, it is 
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more complicated.

I think all of us would like to see the money 

invested faster, and if we could make a reasonable estimate, 

do it. But I think your point is well taken to say that, in 

any event, we ought to bid out that sort of short-term money 

manager just like we bid out the index fund for equity.

CHAIRMAN MOYNIHAN: John, do you want to follow 

up?

DR. COGAN: Yes.

CHAIRMAN MOYNIHAN: And then we have Tom Saving.

DR. COGAN: The second question: If we go through 

the government, that is, the government is the collector, 

then we have this reconciliation problem. If an employer 

has a pension fund or a 401(k) plan that satisfies the 

requirements that people would want to impose diversified 

plan, let's say on the investments, one way to achieve a 

real time reconciliation is to simply not send the money to 

the Treasury; but if the employer and the employees agree to 

send the money directly to the private fund manager, and 

never have it go through the middle man and incur the 15 

month delay.

Now, the question is: When the subcommittee took 

up this question of collection, like did you all consider 

that, and you are kind of leaning against it, and maybe you 

could sort help me understand why it was rejected.
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CHAIRMAN MOYNIHAN: Well, we want to move on. 

But, Estelle, do you want to respond to John, because Tom 

Saving had --

DR. JAMES: I think we had two concerns about that 

kind of approach. One concern is the compliance problem. 

It is how would you be sure that, in fact, all of the 

employers sent the money in, and/or did not make private 

deals with the workers to avoid this payment? So, that is 

one problem.

Another problem, again, is the cost that this 

would imply for small employers, or the difference of access 

that it might imply for large versus small employers. It 

would be relatively easy for a larger employer to do this. 

It would be much more difficult, more onerous, for small 

employers to do this.

It would add to their paper work, to their costs. 

 And we thought that, for that reason, the simplest thing 

was to simply have them treat it as part of the payroll 

taxes they submit now, and the system could then divide that 

part off. So that was the rationale.

CHAIRMAN MOYNIHAN: Tom.

DR. SAVING: I think, as I listen to this, not 

having been part of this, the administrative group doing 

this, someone may get the impression that this is a whole 

new set of things that the Treasury is going to have to do, 
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when actually they already do all of this.

I mean, this is exactly what they do. They do 

collect this money. They get it. They do not reconcile it. 

 But what do they do with it? Well, what actually happens 

to it is, of course, if revenues are coming in faster than 

expenditures, as they roll over parts of the debt which they 

are doing every week, they roll over less of it.

And that means they are actually earning the rate 

of return on that, of the mean duration of the debt they are 

rolling over. And so, that is what is actually happening. 

That is the rate of return they are getting.

And if that is the rate of return you gave 

individuals, this is already in place, and they are already 

doing it, and the only real costs is that this other 

portfolio might be earning slightly more than this so-called 

safe portfolio, which would be the mean duration of 

rollovers during that year.

So, this is not some new, on top of everything 

else we are doing cost. It is already there, and it is just 

a matter of when you get it. And I think that while it is 

important that it would be nice to have it faster, it is not 

a giant issue, and we are not introducing a new cost --

CHAIRMAN MOYNIHAN: It is a management issue.

DR. SAVING: Yes. And at the current point it is 

free, because we are already doing it.
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CHAIRMAN MOYNIHAN: And Gwen will agree with me, I 

think you all will, that our social security system is a 

miracle. I mean, 45 million people get a check on the same 

day of the month all over this country. Huh?

MS. KING: Well, they used to get it on the same 

day. The miracle, Senator, is really the 63,000 people who 

put their shoulder to the wheel every day and make the 

system work. That is incredible.

CHAIRMAN MOYNIHAN: Yes, I think Olivia, and then, 

Jerry, you wrap up.

DR. MITCHELL: I just had a question, or a comment 

to follow up on Fidel's point. I have done a fair amount of 

work in Mexico with its privatized model, and it is not one 

that we are going to follow because it has certain other 

issues. But I just wanted to make a point on this 

management question.

In Mexico, the money, by law, must be in the 

market seven business days after it is deposited. And if 

Mexico can do it, surely, we, one of the most financially 

sophisticated, riches countries in the world, can do this. 

How did it happen?

Social security there designed a software program, 

a database, and then social security folks go out and help 

the small employers put their data into the database and 

make sure the money gets in effectively. It is beneficial 
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because the record keeping is centralized. It is submitted 

electronically. The employers have help putting it 

together.

And the other piece of it that is very beneficial 

is that the supervisory agency which in Mexico is called 

---, has daily reports coming in from the employer. So, 

they know the money is getting in. It is getting in 

efficiently, and how it is being managed.

So it helps from the point of view, not just of 

the investment side, but the supervision and monitoring 

side. But I think we really ought to think further about 

making some stronger recommendations on making management 

more streamline.

CHAIRMAN MOYNIHAN: Down the line. A final remark 

on this question from you, sir.

MR. PARSKY: I think work along the lines that 

Olivia suggested would be proper. I think the main point, 

at least that I was trying to raise, I think Tom responded 

to, and that is I think we need to give people the comfort 

that neither the government is going to take the funds and 

invest it somewhere else before reconciliation, and that 

they will be earning their same rate of return that Tom 

described from the moment they make their choice. 

Reconciliation can come later, as long as they are going to 

earn that return.
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CHAIRMAN MOYNIHAN: Fair enough, fair enough. 

Now, another question, which again I think will have to be 

resolved, but it does not seem to me that our mission 

necessarily has to do. We, obviously, have to point to it 

which is: What would be the range of investments, of 

portfolios?

You have the TSP which began with three and now 

expands, and some suggested that it is expanding in ways 

that are a little curious. Do you have the TIAA that must 

have zillions of options? Fidelity is known for the 

impenetrability of this management and extraordinary results 

that it gets accordingly.

MR. POZEN: Thank you.

CHAIRMAN MOYNIHAN: But do we want to be specific 

on this, or say let experience be the guide of the Board 

that would eventually be responsible?

MR. FRENZEL: In the subgroup when this was 

discussed, we looked to Bob Pozen for guidance because of 

his experience. You know, I do not know how much time you 

want to spend on this because we have already discussed it a 

little bit. But I think he really can tell you what we 

talked about. Most of us said, "Oh, yeah, whatever you say, 

Bob. That's really nifty."

MR. PARSKY: We all started that way. It's okay.

MR. FRENZEL: But, as I recall, Bob, it was sort 
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of the thrift plan business of passively managed funds. And 

then with the addition of a couple of balanced funds, and 

the X fund being perhaps several funds age rated, but you 

describe it.

MR. POZEN: No, I think you did a good job. I 

think the thrift plan for this type of system is 

appropriate. I do not think it is appropriate to have 200 

choices. I think the thrift plan is a good start. I think 

Olivia's point of having an inflation index bond fund is 

good, if we still inflation index bond, which is itself an 

issue.

And I do think having two balanced funds or 

lifestyle funds would give us the appropriate range to start 

with. I think that that would be about right. We are 

trying not to overwhelm people, but to give them some degree 

of choice. This is well tested with a thrift plan.

The only thing we are really suggesting is that 

there be through these two balanced funds or something like 

that, one fund solution, so that for people who say, "I want 

a little stock. I want a little bond, but I am not sure how 

to do it, and we just give them a one fund solution."

CHAIRMAN MOYNIHAN: Sure. Can we then hope for a 

proposal from the subgroup when we next meet?

MR. POZEN: Yes.

CHAIRMAN MOYNIHAN: I think you are so close to 
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this, and it is so plain. Then there is the question of, in 

terms of the range of services, a personal account system 

might offer, there are questions of, should allocations be 

made once, every 12 months, once a year?

Some, I think, mutual funds let you do it weekly 

if you --

MR. POZEN: Daily.

CHAIRMAN MOYNIHAN: Daily, if you have a mind, but 

they charge you for it. And that's a fair exchange. And if 

you do not do it daily --

MR. POZEN: And we discourage it, too.

CHAIRMAN MOYNIHAN: Oh, you discourage it. I see. 

 What do we think on this? Is this a subject do we have a 

view, or need a view? Fidel.

MR. VARGAS: And this goes back to, in some ways, 

ties into the point of reconciliation. Because, at this 

point, now we are saying, "Well, at how many points during a 

year are people going to be allowed to change their 

allocation?" And you very well, Senator, outlined the range 

of possibilities.

And I think, again, I mean the fundamental point 

here is this is a social security personal retirement 

savings account. This is not a 401(k). This is not a day 

trading account. And while we would love for people to be 

able to have as much choice as possible, the constraints 
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that we are dealing with, you know, keeping administrative 

costs low.

And also, really, essentially is what we are 

saying is we are counting on long-term consistent returns 

from the market, you know, along with the idea that if you 

invest in the stock market over the long-term, and you are a 

long-term player, and you are not banking on making quick, 

you know, returns over a week, or a day, or anything like 

that, that over the long-term that this will work out.

So, I think that, you know, there was a range of 

discussion. But I think the conservative approach or the 

safest -- I do not want to call it the safest, but the 

approach I think we -- the views kind of coalesced around 

was to limit the amount of -- the ability for people to be 

able to make their asset allocations.

So, limit it to a one time per year, or over a 

period, say, the summer, as Bob suggested, and do it once a 

year, so that they can, you know, have the ability to change 

their allocations.

And the other point is that if people want to 

after they have begun, as Commissioner Johnson has pointed, 

they begin to see their growth in their accounts. And my 

believe, as well, is they are going to open up 401(k)'s, and 

they are going to open up, you know, accounts online.

And, at that level, they will be able to make 
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their choices, and do it as many times as they would like. 

But I think that is where the discussion at this point --

CHAIRMAN MOYNIHAN: That is where you are heading?

MR. VARGAS: Yes.

CHAIRMAN MOYNIHAN: Gwen.

MS. KING: Mr. Chairman, I would agree with Fidel. 

 I think that the biggest point of disagreement would very 

like be that people say, "Gee, I can only change once in a 

12-month period." But I think he very nicely laid out the 

reasons for that.

If we are intent on keeping administrative costs 

low, we also need to point out that that helps people, 

because that gives them a higher return on their investment 

by not having to pay out their money in administrative fees.

So, I think this is about right. And I certainly 

would think that this might be something that the Board when 

they are reviewing how the whole system is working after a 

period of time might look at. And if technology allows it 

without any increase in administrative costs, there may be 

some recommendations for change. But I think this is about 

right this time.

CHAIRMAN MOYNIHAN: Well, it sounds to me like we 

are coming along very well here, and we are going to hear 

from you in two weeks. Now, I am going to make a suggestion 

which you can agree with or not. We are doing very well on 
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this matter of administration.

Would you like to just stay with it, go to a brief 

lunch, and then come back and we are on to the big -- not 

that these things are not essential, but the big question 

and the most difficult question which involves social 

security as well, is the achieving a fiscally sustainable 

system. Would that be all right?

MR. FRENZEL: If you feed us lunch, we will follow 

you anywhere.

CHAIRMAN MOYNIHAN: If I promise to feed you 

lunch? This is a sustainable discussion.

Now, we get to a question of genuine social 

consequence quite apart, I think, from the prudence and 

efficiency of a management system. And that expression of 

what do we do with a husband and wife arrangements where 

divorce is so widespread?

Not as quite as widespread I think as people -- as 

the averages will mislead you, because about two-thirds of 

marriages are quite permanent, and another third are very 

serial monogamy, I think is the word.

MR. PARSKY: You are digging deeper, Mr. Chairman, 

keep going.

CHAIRMAN MOYNIHAN: But this is a subject we have 

not resolved. And I think Gwen would, I would respectfully 

say, we haven't already resolved in social security, which 
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begins in another era, and you have a look of someone who 

has been there, your remark just now.

We ought to come out with something important and 

equitable which will I think be new. Now, who wants to 

resolve this? Sam.

MR. BEARD: I will get it started. On the 

administrative task force we have talked about this. And we 

start from the viewpoint that in whatever we do, one of the 

things that we should do is look at the rights of women in 

protecting women in what would be a new modern system.

And although it is not an administrative question, 

one of the things we have talked about is within social 

security is keeping some kind of base payment, because on 

the issue of poverty most of the instances of remaining 

poverty and old age are widows and women.

So, though it is not an administrative issue, we 

start with a view that discussing a need for a base payment. 

 When you continue on the issues of women, one of the things 

that comes up in discussions around the country is, if you 

go to a partial system with accounts, is it a disadvantage 

for women when they leave the work force during child 

rearing years whether it be short or long?

And just one of the things that we have discussed 

in that regard is when women leave the work force during 

child rearing on a voluntary basis the family should 
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certainly have the right to keep the payments going into the 

account. Because where the woman leaves the child for the 

work force during child rearing, she is going to retire.

CHAIRMAN MOYNIHAN: And you are saving.

MR. BEARD: And you are saving, and you do not 

want to be penalized for child rearing years, so that is an 

option.

Now, on the issue of divorce, there has been good 

discussion about pretty much during the marriage years, 

there are two options: One is, when you get married, you 

pay equal amounts of money into the two accounts. Let's say 

the wife is earning more than the man. Equal payments enter 

the account throughout the whole period of the marriage.

Then, in case of divorce, during the marriage the 

accounts have grown equally and there is a fairness. The 

other option is the accounts during marriage grow, and then 

if the marriage ends up in divorce, do a community property 

kind of settlement at that time.

So, those are the kinds of issues that we have. 

And starts with if we go to a partially funded system what 

do we do to protect the rights of women?

CHAIRMAN MOYNIHAN: Can we look for a proposal 

from you all in three weeks time? Oh, yes, Estelle.

DR. JAMES: You know, we discussed these options 

at considerable length. Again, we have not take a vote, and 
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do not have -- I think that many people in the group feel 

that the most equitable thing would be to say, the assets 

that were contributed during marriage, and the investment 

income that was earning during marriage should, as a default 

position, should be divided equally between the spouses in 

the case of divorce.

So, that would be what people could expect to 

happen. That is consistent with the community property 

idea, in addition to those accounts during marriage would be 

split equally in the event of divorce.

Now, I think there was also some feeling that if 

the parties chose to agree otherwise, as part of the overall 

divorce settlement, they should have the right to do that. 

But that would be the presumption, the starting point, that 

were accumulated during the marriage would be split equally.

CHAIRMAN MOYNIHAN: Good. Well, I think we are 

very close to agreement here, and just get it out and put it 

on paper. Fidel, that is your job.

The next question is one that Bob Johnson raised 

earlier which is: Should there be pre-retirement access to 

these resources? And can you classify the circumstances in 

which that would take place?

This is a very serious matter. Well, I will just 

put it to you this way. I am glad nobody ever let me touch 

my TIAA-CREF, and but there you are.
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MR. JOHNSON: Mr. Chairman, we talked about this.

 And I think it seemed to be the consensus of the group that 

-- and I agree with it, that social security is 

fundamentally a retirement account; and that we, in this 

country, because of a culture of not saving, the government 

basically mandates savings for in the best interest of 

everybody concerned.

And there is a part of me that concurs with that, 

and there is a part of me that says it smacks a little bit 

of, to be somewhat paternalistic. But I guess there is a 

time when paternalism makes sense, and this may be that 

case.

However, I think once you move into private 

accounts, you are sending to the citizenry a message that 

says, "We want you to have more control over your retirement 

funds. And, therefore, we want to give you options to 

invest it in the market, and various types of instruments 

that will allow you to maximize a return. And that will 

give you greater security and greater benefit when you 

retire. And it will also provide sustainability to an 

entire retirement social security system."

That is what we are telling them, and we propose 

to educate them on that process. When we do that, I think 

we are implying to the citizenry that this private accounts 

fund can be used for you in other ways as well, 
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particularly, if there happens to be a catastrophic 

disability, or some other problem that would allow you to 

reach into it. And I believe that, like with your 401(k) 

and your IRAs, where under certain conditions of disability, 

you can reach into those accounts.

And I think we should allow that for the private 

account part of the social security system, so that if you 

have a situation, for example, where you have a family of 

kids and their mom put them through college, and they now 

have jobs, and they are working, and they are young people, 

and they are building up this private account, and their mom 

is now sick. She is suffering from something, and they want 

to provide a nurse for her.

It is expensive, and they happen to have in their 

account a certain amount of funds that they can draw on for 

that. I think that would be an appropriate way to do it; or 

a catastrophic illness where a father's daughter was 

suffering from needing a kidney transplant, going into that 

account could be a way of addressing that problem.

I do not think we would see this abused on a 

wholesale basis if people understand, and if we educate 

them, as we say we will do, that this for your retirement. 

And so, people are not going to use it on, you know, 

frivolous trips to the doctor or dentist.

So I believe that, particularly, with African 
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American families that are likely to face disability early 

on, that having access to this would simply be a way that 

they could exercise their own judgement in when to use it, 

and at the same time provide them with some sense of control 

over their own financial well-being.

CHAIRMAN MOYNIHAN: Right. Could I just make the 

point? I am sure you agree, that we are not I think 

primarily involved here in personal account in a retirement 

system. We are talking about a system of wealth 

accumulation that is in a state that is passed on, that if 

is known people die at 55.

Well, if you die at 55, with such an account, it 

is your money. Whereas, social security, no, and that is 

what the -- I said what I have to say. Estelle.

DR. JAMES: Yes, I would just like to respond to 

the point that Bob raised. I mean, the problems, the kinds 

of situations he mentioned are really difficult situations, 

and I think they have to be addressed.

But I think they have to be addressed, not by a 

retirement security system, but by other parts of the social 

safety net that is by our disability system, by our medical 

insurance system.

And I think we are talking about a retirement 

system here, a system of savings for a retirement account, 

for retirement purposes which will, in part, replace the 
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benefits that people have now from the defined benefit 

account. And my concern is that once you open the door to 

other uses of these funds, however, you know, well-meaning, 

there is the danger that people will withdraw the funds 

early, will find real needs for the funds.

Because many people have real needs for that 

money, that's true, but the problem is the money won't be 

there later on when they retire. And they may be fortunate 

enough to live 10, or 20, or 30, or 40 years after 

retirement. That is what I am planning to do. And if that 

money is not there --

CO-CHAIRMAN PARSONS: Which one, Estelle?

DR. JAMES: Oh, 50, 50, I did not get to that. I 

have good genes. But, you know, if I had taken my money in 

my social security account out earlier, I might be in 

trouble in that 40th or 50th year. And the problem is this 

poses a problem for the individual, for the individual's 

family, and for society, because we do not want to be left 

with a lot of poor old people who have used up their 

retirement accounts earlier before they even retired.

And that is why I would really favor being really 

holding the line and saying, "These personal accounts --

CHAIRMAN MOYNIHAN: Fidel, and then John.

MR. VARGAS: No, as a member of the administrative 

subgroup, you know, I struggle with this as well, only 
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because -- I think and Bob made such a strong and passionate 

case with this that in principle it would seem that this is 

your money, you can do what you want with it.

On the other hand, you know, the other side of me 

is thinking about, you know, what we are trying to do here, 

and, as you said, Senator, in terms of establishing, you 

know, wealth over the long-term. And there is no easy 

answer. However, we are going to have to recommend 

something.

And I think this is an issue where we, on the 

administrative committee, were going to do some more work, 

and we are going to try to you know come back with a 

recommendation that makes sense. And so, but again, you 

know, it is crystal clear, and it makes sense in principle.

What we are struggling with, on the other hand, is 

what are we trying to accomplish? Because I know in my 

case, in my community, similar to Bob, and the African 

American community, there are folks whose life expectancies 

are not as long. They need the money. And so, we are 

struggling with that, but we will be back to the whole group 

with that. Thank you.

CHAIRMAN MOYNIHAN: Do it. Do it. Bill.

MR. FRENZEL: As far as what Fidel says, I hope we 

can work something out. But I did want to question 

something that Chairman Moynihan said about the personal 
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account versus the retirement account.

We are talking about laying this system, whatever 

it is, across our federal retirement system, the social 

security system where either some of these funds are 

supposed to take the place of some on social security, or 

augment it.

We won't know that till we see what kind of a plan 

we have got, but this is a retirement program. And if you 

start to devote it to education or health or other projects, 

you are going to diminish the effect, and you are going to 

cause our critics to be more nervous about whether those 

retirement benefits are going to be there.

Secondly, the government is the insurer of last 

resort in this program, and we are going to get these people 

one way or another. Either we will be called upon to beef 

up social security; we will have greater demands for SSI; we 

will have somewhere else in the system.

So, I think we need to be careful that if private 

accounts cannot carry every burden. And if we want to make 

them work, we have got to have something simple that 

everybody understands without too many options, and we 

cannot let too many people get in there however worthy their 

desires. Thank you, Mr. Chairman.

CHAIRMAN MOYNIHAN: A fair point, and we look 

forward to your final proposal. I have one last question. 
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And the others, there are some others, but they easily are 

handled in the same mode we have here, and by canvassing if 

need be. But there is this question about the choices 

available for taking account distributions during 

retirement.

Now, here is where Bill and I may just be having a 

language problem. We envision a savings system that 

provides a measure of individually controlled wealth at an 

age which we also equate with retirement, but it needn't be 

retirement. Is anybody here going to stop working at 65?

So, we will have to ask ourselves, do you get this 

money at a fixed age regardless of what your employment 

status is? And then, can you choose to have it annuitized, 

which means it will have disappeared at the end of -- you 

know, as long as you live? But it does not pass on as 

property. Do you have a series of choices?

Somebody answer that question quickly please. As 

soon as the question is answered, we can have lunch.

MR. JOHNSON: Let me answer that one if I can. If 

I was ambivalent about the other one, I am firm on this one.

CHAIRMAN MOYNIHAN: If you were ambivalent, I want 

to see firm.

MR. JOHNSON: This one clearly goes to the point 

of the reason why President Bush talked about this as wealth 

accumulation that could be passed on to your family as an 
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estate.

And here, if you go through the system, you work 

to the full age of 65, whatever the retirement age will be 

at the time we get around to approving this, you have 

accumulating -- we will take Vice President Gore's, you 

know, argument through compound interest, you get a nice 

nest egg of $400,000.

And, again, using what Senator Moynihan said that 

you are not going to retire. You are going to do something 

else. So, you have got $400,000, and you want to -- you and 

your wife want to open a bed and breakfast. It cost you 

$200,000.

What's wrong with you taking $200,000 of your 

money? You have retired. You are entitled to it. You 

could leave it to your kids or whatever, and go out and 

continue and have a nice retired life running a nice bed and 

breakfast and/or buying a boat, whatever you want to do with 

it, it is your money.

And I firmly believe that if we tell people it is 

their money, but the government says you cannot have it 

until you either die over time, or until we decide that you 

can annuitize it, and then you know roll the dice that you 

are going to live so long as you have got it, or it is 

really not your money.

I understand the retirement point, and I 
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understand there is a way to sort of allocate a portion for 

retirement. But after you sort of reach the threshold, 

whether you means test how much you should have, or some 

other way, the rest of the private accounts fund should be 

absolutely available for anyone to use to put it in the 

market at a higher yield than they have been having it 

before or whatever.

And I think fundamentally to not do this would 

really be making this something of a charade, and we would 

not be serving our goal of creating wealth, and wealth that 

can remain as an estate or an asset to the family after 

retirement.

So, we need to look at this one real hard and see 

if we can come up with something that gives a great deal of 

flexibility to people who have complied with all of the 

requirements of the system, but now want access to their own 

money.

CHAIRMAN MOYNIHAN: There you are, sir. I do not 

think -- Gwen.

MS. KING: I concur.

CHAIRMAN MOYNIHAN: There isn't much to add, isn't 

there?

MS. KING: I think lump sum distribution ought to 

be option, absolutely.

CHAIRMAN MOYNIHAN: There just isn't much to add. 
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 Mario, and then Olivia, and Estelle. Mario.

MR. RODRIGUEZ: I concur with you, too, Bob, and 

Gwen. But my question I have for maybe Steve, if everybody 

at 65, they retire at 65 years of age, decided to pull out 

all of their money, what would that do to the system on the 

private account?

MR. GOSS: Well, I guess I am happy to be able to 

report that we can't really say because that would depend 

upon what your other subgroup does, in terms of the nature 

of the system, and how it interacts with the individual 

account. There are a lot of possibilities here.

If it turns out that the other group recommends a 

plan as some have in Congress where the solvency of social 

security depends strictly-speaking on what is available in 

accounts over time, with some kind of a mechanism for 

reducing benefits in a very direct sense, this could have 

negative implications.

It could have positive implications if at the time 

when people take the money out there is some kind of a 

permanent reduction in benefits. So, as I understand it, 

you have a long way to go in the other subgroup to work this 

out. And I think in about a month we will probably be able 

to answer that question.

CHAIRMAN MOYNIHAN: Thank you, sir. You have been 

here all morning. And, thank you, Mario, for turning to the 
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authority on these matters.

DR. MITCHELL: I would just like to in our next 

meeting ask Jeff Brown to talk a little bit about the role 

of annuities in retirement, because it seems that he has 

done a great deal of research, some of it with me. That is 

the best stuff, of course.

But what seems to be the case is that, first of 

all, annuity markets can work very well; that annuities are 

very valuable; that inflation index annuities are very 

valuable. And we also know that annuities do not have to 

exhaust the whole sum.

There are ways to design alternative products. 

You would still have a bequest. So, I would like to ask 

that Jeff come back with a little bit of a discussion on the 

role of annuities and the payout.

CHAIRMAN MOYNIHAN: Fair enough. Fair enough. 

Estelle, right quick.

DR. JAMES: Yes, I would like to revert to a 

comment that I made before about making sure that old people 

stay out of poverty. And I think we all share that 

objective. So, I do think in whatever we ultimately decide 

about the distribution, we have to bear that objective in 

mind.

Now, my concern is that, again, depending on what 

eventually comes out of the Cisco subgroup, there is the 
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possibility that if you allow people to use up their entire 

individual account as soon as they reached the age of 65, 

some of them would be left in poverty. The bed and 

breakfast may fail.

We know that many small businesses succeed, but 

many of them fail. So, it is not a sure thing. And I would 

want to make sure in our distribution rules that we say that 

enough money has to stay in the individual accounts so that 

between the DB, the defined benefit, and whatever annuitized 

income or gradual withdrawal income you might get out of the 

individual accounts, it should be enough to keep you out of 

poverty.

Now, to be sure that it is enough to keep you out 

of poverty throughout your life, that really means that at 

age 65 it has to be more than the poverty line for two 

reasons: First of all, you may not purchase a price indexed 

poverty annuity. And, therefore, as prices go up, you will 

need some additional money more than you did initially to 

maintain that same poverty line real value. And, second of 

all, it is possible that the poverty line would go up in 

real terms if you lived 20, 30 years.

So, therefore, I think I would like to see us 

adopt some threshold which could be 120 percent or 

150 percent of the poverty line. And we require that enough 

money be kept in the individual account so that the 
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annuitized value of that account plus the DB at least gets 

you to that threshold. Now, once you are over that 

threshold, I agree that people should have greater 

discretion.

CHAIRMAN MOYNIHAN: I think we may have come up a 

difference of view that is clearly more than managerial.

MR. PARSKY: Also, Mr. Chairman, I think that we 

ought to also wait and see how the fiscal group is coming 

out, because there are some issues that intertwine with the 

issue of poverty.

CHAIRMAN MOYNIHAN: Exactly. And can I say I was 

around when we started the war on poverty? And we decided 

to figure out, you know, what's poor. And a wonderful gal 

in the Census Bureau came up with the idea that it is three 

times the city worker's family food budget which Labor 

Department used to calculate. Well, if you did that today, 

nobody would be poor. That is a pretty arbitrary number, 

too.

Johnson, you are in charge. With that, have a 

good day. Lunch time. I will connect you all, and we will 

be here. Can we just say we will be back here in 45 

minutes?

(Whereupon, the meeting was recessed for lunch at 

12:50 p.m.)
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A F T E R N O O N S E S S I O N

(1:50 p.m.)

III. ACHIEVING A FISCALLY SUSTAINABLE SOCIAL SECURITY SYSTEM

Senator Richard Parsons, Chair

CHAIRMAN PARSONS: Okay. I realize we are missing 

some of our distinguished members of the press and public, 

but we are going to push off. And what we are going to do 

this afternoon, in the interest of having this full and 

comprehensive discussion at this meeting of all of the 

issues, is we are going to --

MR. : Mr. Chairman, may we have order?

CHAIRMAN PARSONS: I know, please. We are going 

to, sort of picking up from this morning, acknowledge that 

there were a number of issues, questions that were being 

agitated on by our administrative subcommittee, some of 

which you heard discussed this morning, which we will go 

back to that subcommittee for further thought and 

reflection; and yet another discussion when they come to 

some consensus that they want to present to the whole 

commission for its deliberation and action at our next 

meeting.

And there were several questions which we had 

intended to get into before the administrative subcommittee 

that we thought, in the interest of time, we would simply 

wait for that second turn of discussion around those 
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administrative issues and move into a discussion of the 

fiscal soundness issue, which seems to be a matter of some 

interest to the now absent press. I guess they are 

upstairs.

And so, I am going to chair the second half of 

this. Senator Moynihan, having chaired the open session is 

now, having set a fine example, turned it over to me. And 

let me say a few words about in the fiscal sustainability 

issue.

As I think everybody knows, we had organized

ourselves into two subgroups to take a first look at some of 

these issues, and then come back to the full commission with 

some thinking that we could then debate, discuss, and 

hopefully make some conclusions around.

The fiscal subcommittee has been looking at the 

issue of the soundness of the social security system over 

the long haul. And they are going to share with you, and 

with all of us, actually, the state of their thinking at 

this point and time.

But just to frame it for you a little bit, I 

thought I would start by making reference back to what the 

charge of this full commission was from the president, and 

the limitations which the president put on us. Because I 

think that is what has guided us heretofore, to this point 

and time, and that is what is guide us going forward in 
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terms of ultimately developing and concluding a final 

report.

The mission of the commission, as set forth in the 

executive order, was to submit to the president bipartisan 

recommendations to modernize and restore fiscal soundness to 

the social security system.

Now, that is the broad mission. What the 

president then did was set up six, what he called 

principles, that should guide our deliberations in respect 

to that broad mission:

• The first was that modernization, which he

asked us to think about, must not change social security 

benefits for retirees or near retirees. You heard that 

earlier this morning, that we are not in the business to 

change the benefits of anybody who is currently a recipient 

of social security, or who is close to retirement.

• The second principle was that social security 

payroll taxes must not be increased.

• The third principle was the entire social 

security surplus must be dedicated to social security only.

• The fourth principle was the government must 

not invest social security funds in the market. That is to 

say, the government must not do it directly.

• Fifth, that modernization must preserve social 

security's disability and survivor components.
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• Sixth was that modernization must include 

individually controlled voluntary personal accounts which 

would augment the social security safety net.

So, those were the guideposts that the president 

set up for us in terms of coming back to him with a set of 

recommendations designed to enhance the soundness of the 

overall system.

Now, this commission has spent the last several 

months going across the length and breadth of this country 

hearing from a host of interested experts and commentators 

on exactly how we should fulfill that charge.

And one of the things I think it is fair to say, 

that the subcommittee on fiscal sustainability has 

determined is that there is within that broad mandate in 

those six principles, there is probably more than one way to 

achieve what the president has asked us to achieve.

The difference is between these so-called 

different alternatives, or approaches, or some people use 

the term options. I do not particularly care for that term 

myself, because I think they shortchanged it, but there are 

lots of ways that you can fix the system.

Not all of them fall within the six guidelines 

that the president gave us, but more than one of them do. 

However, each of those ways involve different policy 

implications, ramifications, and tradeoffs.
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And so, as we have thought about this, we feel 

that our job has come forward to the president, and to the 

policy making body, that is to say, the Congress, with a 

series of recommendations, or a set of recommendations that 

each of which raises a different set of policy implications 

or issues, but any of which will enhance the fiscal 

soundness of the system if adopted.

The reason we are doing it that way is because we 

are not the elected policy makers. We are here to find ways 

that within various policy tradeoffs the objectives the 

president set out for us can be achieved. So, just to give 

you an example, I mean, one easy way, very easy way, that we 

could come back and recommend that we restore the system to 

fiscal soundness is you would say simply raise payroll tax.

Now, that falls outside of the guidelines we were 

given by the president. It is, moreover, I think those of 

you who have attended these hearings would know, not a longterm solution. Because, as a number of people in the work 

force who are supporting the number of people out of the 

work force shrinks in relation to the latter, at the end of 

the day, that is not a system that can sustain itself.

Alternatively, at the other end of the spectrum, 

you could simply say never raise taxes, simply reduce 

benefits. But even that system after a fashion, politically 

impalatable to most, also would fall off its own weight. 
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Because if you extrapolate it out into time, eventually 

benefits would have to be reduced to close to zero, well 

below the poverty line, well below what the system was set 

up to accomplish in terms of lifting Americans out of 

poverty, Americans, elderly Americans.

So, what we have done is we have tried to work 

with it well within those two ends of the spectrum and come 

up with a set of approaches that lean, some more heavily 

towards finding ways to modify the growth in benefits going 

forward, others which change some of the criteria that 

relate to the amount of revenues that come into the system, 

but all of which are consistent with the six objectives that 

the president gave us, and that will lead at the end of the 

day to a sounder, more sustainable, more assured social 

security system.

And I am going to ask two of my colleagues to sort 

of speak to that a little bit more, and then have staff. 

What we tried to was develop a set of criteria by which any 

plan, or approach, or alternative that we come forward with 

at the end of the day by way of recommendation would have to 

measure up against, so that we would know with confidence 

that whatever comes out of this commission by way of 

recommendation will be four square within the objectives set 

forth, and mission set forth by the president, and 

consistent with the charge that it be responsible, it be 
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sustainable, and it be sort of fiscally alive.

So, John, do you want to say a word, and then 

Olivia, and then we will have our staff walk us through?

DR. COGAN: Thank you, Mr. Chairman. What I would 

like to do is just tell a little story about that 

underscores the importance of achieving a fiscally sound 

system, and then turn it over to Olivia to lead the staff 

presentation of the criteria.

My story is about President Franklin Roosevelt, 

and the development of the original social security plan. 

President Roosevelt in 1934, put together a commission that 

was headed by Edwin Witty, was the executive director, a 

professor from Wisconsin, to develop the social security 

plan.

After six months of deliberation, the committee 

reports its plan to the president. The president in 

reviewing the plan found, lo and behold, that the plan 

proposed large deficits for social security, permanent 

deficits in the future. The program would be a permanent 

drain under the committee's proposal on the federal 

treasury.

The president at first thought there must be some 

mistake. No plan of his would impose a permanent drain on 

the federal treasury. Professor Witty informed him, of 

course, that there was no mistake, and this was in fact the 
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committee's plan.

The president, thereupon, ordered the committee to 

go back to the drawing boards and come up with a plan that 

was self-financing. The committee did so, and a few months 

later presented that plan with the president's approval, for 

the United States Congress.

Ever since then, for decades, the guardians of the 

committee's finances on the Ways and Means Committee, and on 

the Senate Finance Committee, have tried to ensure that the 

program remains fiscally sound. Unfortunately, in the last 

couple of decades, it has become unsound.

The president's charge to us, I view as very 

consistent with President Roosevelt's charge to his Social 

Security Commission. Develop a plan or set of plans, 

recommendations that will restore social security's fiscal 

soundness, is the way the president put it to us. And I am 

sure that is the way President Roosevelt meant it to his 

committee.

The subgroup that I have been part of has spent 

the last three months developing approaches for dealing with 

the fiscal soundness, and Olivia will take you through a 

general description of what we have been trying to do, and 

then we will turn it over to the staff to talk about some 

specifics.

DR. MITCHELL: Thank you. Let me just say by way 
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of getting the discussion going, I think it is very 

important to take note that this is the first time that a 

personal accounts proposal has been really seriously 

discussed at the federal level.

Other commissions have made comments to that 

effect. The Advisory Council has talked about this, but 

what is very important in this debate and the discussion we 

are having today is that this is the first time at the 

federal level that we are talking about really adding 

something important to the social security system.

In the process of putting together a plan with a 

personal account in it, our broader mission is one really of 

financial strengthening and fiscal sustainability for social 

security. Now, I have to emphasis at the beginning that our 

mission is an education mission. In fact, as Senator 

Moynihan has reminded me, our mission is education not 

legislation.

And so, that is very pertinent to where we are 

going next. Because where we are going next is we are going 

to be talking about how to attain fiscal sustainability, not 

necessarily with one plan worked down to the minuet details. 

 But we are going to be trying to talk about sensible 

courses of action, which may or may not achieve all of the 

different fiscal sustainability criteria that we are going 

to talk about.
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But, in order to get to the point of being able to 

lay out a small number of courses of action, we really have 

to give I think the president and Congress some clear 

options regarding what the tradeoffs are. So, to show what 

the tradeoffs are, we have made some progress. We have had 

a number of discussions about what the objectives should be 

against which all plans should be compared.

And so, really, this is the framework for fiscal 

sustainability that we are offering today. Our courses of 

action will not reflect our ability to attain all of the 

goals and all of the standards. As other people have said, 

if it were easy, if we could do everything simply, cheaply, 

and immediately, other people would have done so before 

this.

But our goal is to offer alternatives, and to tell 

you where the tradeoffs are. We have a set of fiscal 

sustainability objectives. I think we have a poster on 

this, if you would be kind enough to put it up. And I am 

just going to run through these very briefly, and then ask 

the staff to help us in summarizing our discussions around 

these points.

I would say that Chuck Blahous and Jeff Brown have 

done the work of yeomen, along with Steve Goss, in helping 

us organize our thoughts, and particularly in summarizing 

the key points. So, let me just run through these very 
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quickly, and then I will turn to Chuck to lead the 

discussion going into a little bit more depth.

The criteria, the objectives that we have decided 

are most important are listed up here at six. The first is 

that any system which is moving toward fiscal sustainability 

must have positive annual system cash flows with an 

evaluation period. These are technical terms, and we will 

get some elucidation in a moment.

We also think that improvement in system solvency 

is the direction we need to go. Many of us have argued that 

we need to reduce the rate of growth in system costs as a 

fraction of GDP. You cannot have the system growing 

unbounded forever.

We need to think seriously and clearly about 

improving the 75 year actuarial balance. And, further, do 

not stop there. Do not stop at 75 years, but have things 

look good beyond the 75 year window so that we are not back 

in the red the moment the window moves forward a year.

And then, finally, we need to think very, very 

carefully about how to reduce system liabilities already 

accrued. So, let me with that general introduction ask 

Chuck to go into more detail. Thank you.

MR. BLAHOUS: Thank you. Mr. Chairman, actually, 

I would like to ask Andrew, first, if you could put up the 

cost and income rate chart as well, because we have them 
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both to refer to.

As John and Olivia have pointed out, there are a 

number of measures of fiscal sustainability that the fiscal 

subgroup feels need to be looked at when evaluating reform 

proposals. And one thing that is very instructive, first of 

all, is to see what an unsustainable system looks like.

And if you want to see an unsustainable system, 

you can look at that picture up there, and see our current 

social security system. And under current law, we would 

experience cash surpluses every year until 2016, and then 

the cost and income lines would cross, and there would be 

perpetual and widening deficits after that point, increasing 

without bound, and without limit in perpetuity.

This clearly is an unsustainable situation. It is 

not tenable for a systems --

MR. : Are you planning to stand there 

and hold that?

MR. BLAHOUS: It is clearly unsustainable over the 

long haul for the program's annual obligations, and the 

revenue coming into the program to be pulling apart as 

distantly as they would under the current system. The 

fiscal subgroup has made it very clear that it is guided by 

certain values and principles as it looks at fiscal 

sustainability.

For one thing, they believe that any plan that 
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moves towards fiscal sustainability in a sense is 

strengthening the social security system, because the 

benefits that are promised from the system are thereby more 

secure.

I am having great difficulty keeping track of this 

chart. Olivia, are you going to hold that up?

CHAIRMAN PARSONS: I think the objective is to 

place it so that nobody --

DR. MITCHELL: Carry on, Chuck.

MR. BLAHOUS: Yes, okay. Does anybody understand 

me?

And, as the commission looks at various approaches 

towards attaining fiscal sustainability, it is important to 

remember that perhaps not every approach will enjoy equal 

success. Some might address one form of fiscal 

sustainability more than another, and that is one reason why 

it is important to look at more than one measure.

Just to go in some depth through the criteria and 

measures that Olivia outlined. The first of them is just 

that a fiscally sustainable system has to, at some point, 

return to annual positive cash balances, at some point 

during the valuation period.

And what I mean by that is that if you look in 

this chart, those of you who can now see it in its apparent 

placement, there is going to be a period of time under 
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almost any scenario where the cost rate of the system 

exceeds the income rate. And that is the nature of having a 

system that relies to some degree on a trust fund.

At some point, the system goes into cash deficit, 

and the social security program can turn to the rest of the 

federal government and say, "Make good on some of the bonds 

and the funds, so that we can continue to make full benefit 

payments."

But that cannot go on forever, and it cannot go on 

without limit. And one possible measure of success in 

reforming the system is whether those lines, while they may 

cross at some point, they need to cross back again some time 

within the 75 year period. And if those two lines never 

cross again, then you clearly have a untenable situation, 

and an unsustainable program.

Now, while that is an important measure, that is 

certainly not the only measure. It is a snapshot in time. 

It does not give you a sense of whether or not the program 

has added the national saving in the past sufficiently to 

justify running deficits in the future, and measures that 

look across time, but it is a very important measure 

nonetheless.

A second measure which is commonly cited is the 

systems period of solvency. Under a current projection, the 

system would be solvent through 2038. Now, solvency is a 
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very important measure. It measures whether the program has 

the legal authority to draw upon sufficient revenues to make 

full benefit payments, but it also has great limits as a 

definition and this chart shows why.

You can manipulate the definition of solvency with 

some clever accounting on intergovernmental accounting and 

transfers of intergovernment accounts. That does not 

necessarily improve your actual fiscal situation. You 

could, in theory, make the program solvent just by issuing 

several trillion dollars to the trust fund today and calling 

it a day.

So, while it is an important measure of the 

program's fiscal health, and certainly measures the programs 

legal entitlement to enough revenues to pay benefits. 

Again, it is not a measure that tells you everything that 

you might need to know.

The third measure Olivia alluded to was a 

reduction in the rate of growth of long-term system costs as 

a percent of GDP. The reason that this is important is 

simply that what sustains the social security program in the 

long run is the American economy. And if the program is 

growing faster than the economy that has to support it, in 

my definition it is not going to be a sustainable program.

Right now, the program costs a little over four 

percent of the gross domestic product in order to pay full 
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benefits. Under the current system, that would rise to 

61⁄2/63⁄4 percent within the valuation period, and that would be 

growth that really is 50 percent faster than the rest of the 

economy would be growing during that time.

At some point, we have to get this program to a 

point where the economy that has to support the program is 

growing at least as fast as the program itself, or else it 

is not on a sustainable path.

The fourth measure is the 75 year actuarial 

balance. Now, Chairman Moynihan made reference earlier 

today to the fact that 75 years is a somewhat arbitrary 

window of time. Nothing is written in stone suggesting that 

75 years, as opposed to 50 or 100 years is the perfect 

measure of the program's finance.

It is used somewhat out of custom and tradition, 

but it is intended to capture the fact that this is a longterm program with long-term financing needs. And overtime 

what has evolved, as a matter of standard practice, is that 

we measure the present of the system's cost and its income 

over 75 years and judge the gap between them.

It is certainly very important for the system's 

fiscal health that we reduce the gap over 75 years between 

the program's dedicated revenues and its cost obligations. 

But that, in and of itself, may not answer every question.

DR. MITCHELL: Just a quick factual question. Is 
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it not the case that Congress has asked social security 

actuaries to use the 75 year period as one of its criteria? 

 Isn't that 75 years also comes from Congress?

MR. GOSS: That has not be, per se, put into the 

law. What has been requested in the past in legislation by 

Congress is that there be an assessment of the -- I believe 

it is actuarial status of the program, which has by the 

trustees been interpreted over the years in various way, but 

for a long time now it has been interpreted as a 75 year 

window.

DR. MITCHELL: Thank you.

MR. BLAHOUS: The fifth measure may sound like a 

subtle one, but it is really very, very important. And it 

is that the actuarial balance should not be deteriorating at 

the end of the valuation period. And the reason this is 

important is that it is possible in theory to get to a 

status of solvency or actuarial balance within 75 years. 

But, yet, the program would not really be on a sustainable 

or tenable course.

For example, if you can mentally move the lines 

around on that chart in your mind so that the period of 

surpluses in the near term is bigger, and the period of 

deficits in the long-term is only over the last half of the 

valuation period, you can imagine a chart that looks very 

much like that one in which the system is actuarially 
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balanced.

But that really would not be a sustainable or a 

tenable system. Because if you look one year later, come 

back around and look at the program again, one year of large 

surpluses would disappear from your time window, and one 

year of large deficits would have suddenly appeared within 

your vision.

And the difficulty here is that if you cut off 

your valuation period at any arbitrary period whether it is 

75 years, 30, 10, or 100 years, if the program is in dire 

straits at the end of that valuation period, it is not on a 

sustainable path. And there are different ways to measure 

whether the trust fund balance is deteriorating at the end 

of the valuation period.

Steve uses a concept called the "Trust Fund 

Ratio," and we can do calculations to show how things look 

towards the end of the valuation period. But that is very 

important for all of you. Because if you enact a program, 

and then one year later it is deemed to be insolvent in 

Steve's calculations next year, that probably would not 

reflect very well on the work of the commission.

And, finally, a reduction in system liabilities or 

obligations already accrued. This, again, gets to the 

problem of having a time limited valuation period. We have 

a program that is not supposed to be time limited. It is 
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supposed to be paying benefits and meeting obligations to 

participants for as far as the eye can see, not just through 

75 years.

And one of the issues that we face is that if we 

are going to move to a partially funded system, then we are 

going to have a period of time we are bringing some future 

costs into the present. So, even if in a permanent sense we 

have not made worse or made better the long-term fiscal 

balance of the program, there are timing issues that are 

introduced by moving to a funded system.

And so, therefore, other measures of accounting 

could create problems of incompleteness in moving to a 

funded system. You might actually take an action that would 

greatly improve the systems perpetual ability to pay its 

obligations, and yet it might look within 75 years as though 

you have made the system worse because you have started to 

move to a funded system.

So, it is also really important to look at just 

the overall liabilities and obligations of the program in a 

perpetual sense and whether or not they have been reduced or 

increased by actions that have been taken legislatively.

MR. POZEN: Could I ask you a question on that? I 

am not an expert on government accounting. But in the 

private sector we use the concept of a deferred asset where 

you know that the asset is coming into play, but it is not 
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yet there. It is sort of like if you had accounts 

receivable.

And here, if I understand you correctly, what you 

are saying is if there is some reduction, if people have 

committed to a reduction in the DB portion of their social 

security in exchange for taking something for a personal 

account, then we know that they are going to be paid out 

less from the social security system.

So, I mean, isn't it possible for us to sort of 

capture that in maybe a deferred asset account, or something 

so that we do not -- it feels like we get caught up in this 

crazy accounting that does not make any sense.

MR. BLAHOUS: Right.

MR. POZEN: And, I mean, for me, just looking at 

sort of more conventional pension accounting, no one would 

think of looking at this on a year-to-year basis you know, 

so if you have accrued assets, or assets coming into play. 

So, I was just wondering whether we could somehow reflect 

that in a deferred asset, or something like that?

MR. BLAHOUS: I think that is exactly the point 

and the intent of this last item. Because, as you 

indicated, if you move from a system where the same level of 

benefits -- or excuse me -- to a system where the same level 

of total benefits is provided in the current system, but 

less of it is provided from the defined benefit portion, and 
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more of it from the personal account, it would not make much 

accounting sense to say in some sense that you made the 

system worse from a fiscal perspective just because you have 

changed the method of funding.

But it may be that outside the valuation period, 

the benefits of moving to the funded system are seen and 

inside the valuation system period they are not visible yet. 

 So, in order to get a sense of that you have to capture 

this progress against unfunded liabilities in exactly the 

manner you are suggesting.

CHAIRMAN PARSONS: Chuck.

DR. COGAN: Steve, are you able to modify the 75 

year actuarial balance to reflect this fact? Is something 

that you are able to do within the tools that you have 

available to you?

MR. GOSS: Are you talking about the specific 

aspect that was mentioned last?

I think as we are looking at this without getting 

into an awful lot of detail on this, as we are looking at 

this, I think it is really going to depend upon the exact 

nature of the kind of obligation we are talking about.

My expectation is that this may not be something 

that specifically addresses the concept of actuarial 

balance. But it certainly is something that can speak to 

some concept of an asset or a future reduction of liability 
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that would come into play.

It will really depend on the nature of the 

particular plans that will be developed. And, therefore, 

the nature of the obligation. And, again, without getting 

into a lot of detail, there are some kinds of plans for 

which this approach might actually literally result in a 

change of appearance system assets. In other cases, it 

might not result directly in a change in actual system 

assets. So, I think we really have to wait until we see 

exactly what plans are really developed.

DR. MITCHELL: Can I just follow up on that? When 

you think about accounting for personal account assets in a 

system that might have personal accounts, do those assets 

get counted as part of the big picture that you have been 

talking about, Chuck? Or are those somehow not counted at 

all in terms of the system going forward in the accounting?

MR. BLAHOUS: At the risk of descending into 

minutia a little bit, well, everyone will have to arrest me 

if I go too far on this, but there is some guidance on this 

point that we have received from the Congressional Budget 

Office in OMB, and other sources.

And, as Steve indicated, there is some dependence 

on really the type of personal account plan that has been 

created. Now, if you look at a pure defined contribution 

plan where the individual owns the entirety of the proceeds 
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in that account, and none of it is reclaimed by the 

government as a means of funding defined benefit promises.

What we are told by CBO, and OMB, and other 

sources, is that they will treat the investment in the 

account as an outlay from the federal government. But then 

once the assets are in the account and withdrawals are made 

from the account, or the account appreciates, those would be 

treated as a nonbudgetary event as far as the federal 

government is concerned because they are owned by the 

individual and not owned by the government.

Now, there are other species of plans out there in 

which the government is really using the personal account in 

a sense to guarantee a defined benefit promise, as it were. 

 And, in that instance, there is a little more ambiguity as 

to whether or not the personal account therefore should be 

treated as still being on the government books, and assets 

of the federal government, or whether they are really owned 

by the individual.

You can make the arguments either way. Some could 

argue that since those proceeds are in a sense being used to 

fund a defined benefit promise, they should still be on the 

federal ledger.

Now, there is one other aspect of this that I 

would mention, which is that we did a little research on 

this when we were looking at various ways to account. And 
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it turns out that the federal thrift savings plan trust 

fund, even though these are pure defined contribution 

accounts and belong wholly to individuals, they are counted 

as being in the federal thrift trust fund.

You look in the federal budget, and they will list 

the trust fund, and they will tell you how many assets are 

in this fund, how many assets are in that fund, and how many 

assets are in the other. And they all belong to 

individuals, but they are counted as being part of the trust 

fund.

Often I think it is assumed in public parlance 

that if money goes into personal accounts that somehow it is 

out of the trust fund. That is not necessarily the case. 

If you did it like the federal thrift savings plan, they 

would be in the trust fund.

DR. JAMES: But I suppose in the federal thrift 

plan, although they are in the trust fund, there are 

obligations against that. Because, actually, the 

individuals are owed whatever is in those account.

MR. BLAHOUS: Right. It is a measure of net 

assets accumulated at the time that measure was taken. And, 

of course, people are going to be making withdrawals from 

them later on.

But, as you know, Steve, the actuaries office, 

they do do projections on net accumulations in personal 
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accounts that do take into account the withdrawals that will 

be made as more and more of these individuals are in 

retirement. So, it is possible to do projections on the 

build up and the draw down of the personal account within a 

reformed social security system as well.

DR. JAMES: Could I just add that it seems to me 

that when we talk about what is in the individual accounts, 

more important than the question of how it enters from an 

accounting point of view, is the question of what the 

economic impact is. And I realize that goes beyond what we 

are discussing now.

But what we hope is that the build up of funds in 

the individual accounts represents increased saving that can 

be used productively and expand that GNP that we are 

concerned about that is ultimately going to back everything.

MR. PARSKY: Can I just ask one question? I am 

working my way through the principles and the fiscal 

sustainability objectives. And as I wander through these, I 

just want to ask one question first. How does the use of 

general revenues fit or not in this combination of factors 

in your mind?

MR. BLAHOUS: I should preface my remarks by 

saying this subject is not without controversy.

MR. PARSKY: Well, I figured at about 2:30, it 

would be appropriate to start a little controversy, but 
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that's okay.

MR. BLAHOUS: Certainly, what general revenues do 

is increase the revenues that are committed and obligated to 

the social security program. So, in that sense, they could 

be regarded as a revenue increase.

Now, what they do not answer, however, is the 

question of how that revenue is to be generated. It is an 

increase in commitments, but not necessarily a specification 

as to where that money is going to come from. It has to 

come from somewhere.

Certainly, in a cash starved federal budget it is 

a reasonable assumption that they would have to come from 

taxes or tax increases, although if there was room within 

spending totals, they could be created by cutting spending; 

or if the government were running an overall surplus at the 

time, they could be made available simply by running a 

smaller surplus.

But, with respect to the criteria here, I think it 

would be a subject of some controversy as to whether or not 

general revenue transfers help you with very many of these 

criteria. Certainly, they help you with measures two and 

measure four. They would not address measure 3, nor would 

they address measure 1.

MR. PARSKY: Well, I certainly agree with that. 

However, in trying to develop an approach, a combination of 
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personal accounts and what to do, or how to deal with the 

fiscal sustainability issue, I think it is important that we 

identify whether or not general revenues of any magnitude 

are going to be necessary under any set of circumstances.

And, if so, that may be a priority that this 

commission would say absolutely, no matter where you get 

them from. Then, we may say, we would not increase taxes to 

generate them. That would violate one of the principles. 

But we certainly could say the priorities that our political 

system ought to put forward should place that at the top of 

the list because social security is a system that everyone 

has said is a number one priority.

CHAIRMAN PARSONS: If I may, Jerry, I think you 

are right on the point of why the subgroup thinks we ought 

to have a range of approaches. Because, you know, you start 

from the irrefutable fact that we now have a system that 

promises to pay out more than it promises to take in. This 

is a problem.

So, you can solve that problem, growth measures, 

by saying, "Okay. We are going to reduce the level of what 

we promised to pay out to meet the level of what we got 

coming in which means reducing the level of growth and 

benefits going forward." Or you could say, "Well, we have 

got to somehow take in more, so we can keep the promise to 

pay out more."
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Now, implicit in that, as Chuck would say, there 

are policy tradeoffs. If you say we are going to take in 

more, okay, well, where are you going to get it, and how are 

you going to raise it?

And those are issues that our policy makers, our 

elected policy makers should grapple with, because if they 

do not have good answers to that, then they may have to say, 

"Well, then we are going to have to reduce the level of 

benefit growth."

But those are the kinds of issues that, taking up 

from what Olivia said, we need to be very clear about what 

the tradeoffs are. We need to educate the American public 

as to what the current situation is; what the possible 

approaches to fixing that situation are; and then we need to 

encourage and help our elected officials choose from among 

the alternatives and come up with a plan which we can help 

them with that puts us on a sustainable course going 

forward.

MR. PARSKY: I think that is absolutely right. 

And many, if not most of those options, or alternatives, or 

tradeoffs, I think, will require the use of general 

revenues, many of them, if not all of them. And I think it 

is appropriate to identify that and not be afraid of it, 

because it is part of what we have been asked to do.

How they are used? Are they a direct transfer? 
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Are they alone? How are they used to work our way to a 

system of long-term sustainable is an issue that needs to be 

ironed out.

CHAIRMAN PARSONS: I think it is fair to say many 

of the approaches would require general revenue, but not

all, and we will certainly explore both sides of that.

MR. BLAHOUS: One technical bit of information I 

would throw out in response to Jerry's question is that we 

do have a measure of the present value of the amount of 

general revenues that would be required to fill the hole 

under current law. And that is about $3.3 trillion over 75 

years in present value terms.

So, one thing we can certainly do in evaluating 

plans is to evaluate how they impact upon that $3.3 trillion 

amount.

MR. PARSKY: That is exactly my point. If you set 

that out, if nothing is done, this is what it will cost.

MR. POZEN: I thought it was $7 trillion.

MR. BLAHOUS: Well, this is the present.

MR. POZEN: By 2038, it will be $7 trillion?

MR. BLAHOUS: Right. In real dollars starting in 

2038, I do not know what the figure becomes. But one thing 

we have been trying to do in our projections is to smash 

everything down to what would happen in the present value 

today, 2001, for an easy snapshot look.
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MR. PARSKY: Bring it down. Do not smash it down.

MR. GOSS: If I might, Chuck, as usual, is right 

on target. Actually, this year's number of $3.4 trillion. 

And I would just suggest that the $3.4 trillion amount is in 

fact exactly parallel with the concept of actuarial balance. 

 It is sort of the present value dollar equivalent of the 

1.86 percent of payroll actual deficit.

CHAIRMAN PARSONS: Would just expand on that a 

little bit? Because, again, I think from an educational 

perspective, just so people understand the nature of the 

problem. And we had such controversy around our interval 

report, which I actually thought was pretty clean vanilla.

But would you explain to those who care to listen 

what that means to be $3.4 trillion, present value dollars, 

in deficit?

MR. GOSS: What that means essentially is if we 

look over the 75 year horizon, albeit, arbitrary in the 

scope, but selected in the 75 year period, and keeping in 

mind that the social security system as we have it today, 

and as it has been constructed by Congress over the decades, 

is an essentially pay-as-you-go system.

For that reason, its financial status is generally 

evaluated by looking over this 75 year horizon on the basis 

of what kind of asset values are available as counted in the 

trust funds today, and then adding to that all of the income 
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that is expected to accrue over the next 75 years by way of 

people's contributions through their payroll taxes, and then 

taking away from that the expected amount of benefits that 

will be paid out over the 75 year period.

And so, we are looking at the balance of all of 

those over the 75 year period and seeing where we come out 

at the end, and then expressing that all in present value.

Now, expressing it all in present value, what that 

really tells us is what is the dollar amount that if we had 

it in addition to our current trust fund levels would have 

us set for the next 75 years and fully able to pay the 

benefits over that period?

And the answer is essentially $3.4 trillion over 

and above what we currently have residing in the trust 

funds.

CHAIRMAN PARSONS: Well, let me just ask. I think 

you have succeeded, Jerry, in creating at least some matter 

of interest.

MR. PARSKY: You asked me to do that.

CHAIRMAN PARSONS: I did. I did. Does that mean 

-- or I am interpreting that in the following way; that if 

we did not change the benefit level, or if we did not change 

the amount of in-flows, the level of taxes, payroll taxes, 

that we would come up short.

We would not be able to pay, in that 75 year 
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window, we would not be able to pay the existing promised 

level of benefits by $3.4 trillion in present value dollars, 

which is some larger amount down the road.

MR. GOSS: Exactly. Keep in mind, this is over a 

75 year period. So it is a lot of years, and a lot of 

people's benefits, but it will be $3.4 trillion.

DR. SAVING: I would like to ask you, because 

Jerry's question was about general revenue transfers. And 

since you are actually counting the trust fund as if it is a 

general revenue money, actually, the trust fund balance when 

it gets turned in is actually a general revenue transfer.

So, the real present value of actual general 

revenue transfers that has to be made is, what, $1.1 

trillion, plus your $3.4 trillion? Is that right?

Because if you are counting that as an asset, no 

money flows into the treasury from the trust fund view. It 

generates no income to the treasury, and the treasury 

actually has to pay the benefits. So, as a general revenue 

transfer -- now I know the accounting of it.

But I am just saying, as a real general revenue, 

monies that must come from the general revenue and taken 

away from education, and defense, and anything else that we 

are doing, actually, are four trillion.

Is that right, Steve, I think is the way you are 

doing this?
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MR. GOSS: This particular question always sort of 

raises the issue of compared to what?

DR. SAVING: Yes, but it is general revenue. I am 

talking about money from the treasury that goes to social 

security. How much money does the treasury have to give 

social security? Forget from revenues that come in from 

taxes?

MR. GOSS: Over and above the cash flows that are 

expected for the next 75 years, you're correct. The trust 

funds would need not only the $3.4 trillion, which is not 

currently funded, but it would also need to have the general 

fund provide the $1.2 trillion.

DR. SAVING: Yes, well, they have to come back and 

give us that too. So, these are all --

MR. GOSS: That is currently are to be held in the 

--

DR. SAVING: And that is what Jerry was asking 

about, general revenue transfers. The source of them can be 

what you call the trust fund which still are just taxes; or 

they can be Defense Department lower expenditures. But that 

is what I meant. I wanted to make sure that people in the 

audience understood that. I know we understand it.

MR. GOSS: But this is a semantic, or perhaps --

DR. SAVING: Well, it is not semantic. This is 

money. This is real money. It is not semantic.
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MR. GOSS: It is real money. But when you say a 

transfer, generally, people think in terms of if there is 

the trust fund obligation.

DR. SAVING: Right.

MR. GOSS: But if that money is paid, it is not 

thought to be a transfer.

DR. SAVING: Well, no, I think generally people 

think of a trust fund as something, the revenue from which 

actually accrues to them and they can spend. That is what 

generally everyone in the audience I think thinks that a 

trust fund is. And our trust fund generates no revenue for 

the treasury.

And I know you and I understand that. I just

wanted to make sure that what we are talking about in 

general revenue transfers what we mean.

MR. BLAHOUS: Perhaps, I can summarize this by 

saying that this $3.4 trillion figure that was referred to, 

you are correct, it is exclusive of the costs from 2016 to 

2038, or redeeming all of the bonds in the trust fund which 

is above and beyond the $3.4 trillion which is going to have 

to come from general revenue. From a comparative 

perspective, of course, every possible approach is going to 

be saddled with that problem so.

CHAIRMAN PARSONS: All right. I think we had 

Gwen, and Lee, and then --
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MS. KING: This is going to be very quick. Steve, 

your projections, particularly for the defined benefit 

increases built in over the 75 year period are based on an 

assumption that the increases which are stated currently in 

the statute according to the consumer price index will kick 

in. Is that what you're looking at?

MR. GOSS: Absolutely. Currently, in the statute 

of the Social Security Act, there is this formula for the 

benefits that determines how much you get when you first 

become eligible at age 62 for retirement, for example. And 

then it also states that there will be the cost of living 

adjustment automatically every year at the rate of increase 

in the consumer price index.

All of our projections take fully into account 

those measures per the assumptions that our trustees, Tom 

Saving one of them, have suggested to us as being 

appropriate assumptions.

MS. KING: Okay. So, when you look at the 

actuarial balance, you are starting with the year 2001, and 

looking 75 years out.

MR. GOSS: Exactly.

MS. KING: So, all of that could turn on a dime 

where some of those assumptions to be changed by statute, 

not necessarily by our recommendations, but by statute. For 

instance, if you did not use the CPI and you used some other 
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measure for indexing the 75 year actuarial balance figure 

would shift somewhat.

MR. GOSS: Absolutely true. I think the 

distinction that we would make though is that we would say 

that if somebody would say, for example, that the cost of 

living adjustment, which is now based purely on increases in 

the consumer price index, if someone were to say, for 

example, do not base it on the consumer price index, but say 

one-half percentage point each year less than the consumer 

price index, that would not be a change in assumption 

because the trustees would still say that they believe 

presumably that the consumer price index will grow at 3.3 

percent per year.

The cost of living adjustment then would be 

operating at a small level not by assumption, but literally 

because of legislative change.

MS. KING: So, if you actually had some different 

measure, then your 75 year balance might change to some 

other?

MR. GOSS: Absolutely. Just for an example on the 

cost of living adjustment, if that were to be based not 

strictly on the CPI, but on the CPI minus one-half 

percentage point, that would change this actuarial deficit, 

which is 1.86 now, by about .7 percent.

MS. KING: Okay.
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MR. GOSS: Take away a little over a third.

MS. KING: It would also shift, would it not, if 

there were some agreement for offsetting some portion of the 

currently existing or statutory defined benefit in order to 

achieve say a personal retirement account. I mean, the 

assumption is if you -- I hate to use the terms carve out.

But if you do not add additional money for an 

individual retirement account, but if there is agreement 

that we would take a portion of what we currently pay into 

social security to create an individual retirement account, 

and there is also some agreement therefore since you are not 

paying in the whole amount of the taxes you do not get the 

full defined benefit.

So, there is some offset to what you get, a 

lessening amount. Is that something you could score, or is 

tat absolutely going to -- do you have to wait until you get 

a plan that is passed legislatively before you could figure 

it all out in the implications for a 75 year balance period?

MR. BLAHOUS: Could I take a crack at that?

MS. KING: Good luck.

MR. BLAHOUS: I do think it depends on the design 

specifications of what type of account you are talking 

about. From the standpoint of the actuarial scoring, there 

is different ways you can go.

If you create sort of a truly defined contribution 
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account, and then you are making offsets to the traditional 

defined benefit based on some sort of assumed rate of return 

in that account, and if the individual is entitled to the 

entirety of the proceeds from that account, then basically 

the transactions from the account are really sort of 

invisible accept insofar as the defined benefit obligations 

are now reduced because you have reduced them in the law 

proportional to the contributions to this account.

MS. KING: If we were not going to follow the 

thrift savings plan approach.

MR. BLAHOUS: And hold it in the trust fund. 

That's right.

MS. KING: And hold it in the trust fund. How is 

that to be decided though, Chuck?

MR. BLAHOUS: Well, it really depends on the law, 

and also I think to a degree on the recommendations coming 

from this commission. You could recommend to do it one way 

or the other way. You could specify that it should be 

accounted for exactly as the federal thrift savings plan and 

be considered to be assets within the trust fund and follow 

that model exactly, or you could leave it open for Congress 

to determine, or you can specify the opposite.

MR. GOSS: But just to add to that, I think a 

number of the questions here have sort of revolved around a 

distinction that I think is probably important. And that is 
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-- and Chuck and Jeff have both addressed this already 

really, whether we are thinking in terms of really the 

solvency of the trust funds, per se, just the narrow 

definition of the social security system versus the broader 

overall unified budget of the government.

And in those two different context, some of these 

questions like Mr. Parsky's questions earlier, might 

conceivably come up with different answers. But more 

specific really to Ms. King's question, if an individual 

account structure is developed that would in fact literally 

-- I think you used the word "carve out" some payroll taxes, 

that would of course have implications in terms of the 

scoring of social security financing.

And then if there were specified, and I think 

Chuck was correct on this also, if there were specified 

reductions to the defined benefits under the current systems 

by way of any kind of an offset that would obviously also be 

scored. So, the combination of those two would operate.

MS. KING: Thank you very much, both of you.

CHAIRMAN PARSONS: Lee

MS. ABDNOR: Thank you. I just had a quick 

question. I want to make sure I understand. Once the trust 

fund has built up the amount of IOUs, bonds that are going 

to go into it, what is it going to cost to pay it off?

You know, where they say that it will, you know, 
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we will run out those bonds by 2038. And I thought I heard 

you say 1.2, or something like that, but that is what I 

thought was in there now was $1.2 trillion. What is it 

going to cost to pay off the trust fund in income taxes or 

general revenues?

MR. GOSS: Well, the current amount that are of 

assets.

MS. ABDNOR: Right.

MR. GOSS: And then some object to that reference. 

 But with the current amount of obligations, in effect, that 

are being held, I mean, special issue bonds for the trust 

funds is $1.2 trillion.

However, because between now and 2016, the trust 

funds will continue to run cash flow surpluses under the 

current and immediate assumptions, and even thereafter there 

will continue to be some increases in the trust funds. I 

believe somewhere in the order of a $5 trillion will be the 

maximum level in current dollars.

MS. ABDNOR: Okay.

MR. GOSS: It is a quite a bit less than that. I 

think in CP index counts it was more like $3 trillion will 

be the peak that will be reached. And, thereafter, between 

that point and 2038, that amount then will be redeemed and 

will have to be paid from the general fund of the treasury 

to the trust funds to make good on those bonds.
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MS. ABDNOR: So about $5 trillion, and then plus 

the $3.3 trillion that we are going to be short after that.

MR. GOSS: Those are slightly different terms, 

but, yes.

MS. ABDNOR: Okay.

MR. GOSS: But more or less.

MS. ABDNOR: Okay.

CHAIRMAN PARSONS: John.

DR. COGAN: Jerry, you mentioned that in most of 

the plans that we have reviewed, I think from Capitol Hill 

and from groups that general revenue was part of their 

solution to ensuring that all of the benefits could be paid, 

I think it is important to distinguish between a permanent 

infusion of general revenues from some unspecified source, 

and a cheaparary infusion of general revenues that might be 

necessary to cover some transition period that would be 

associated with personal account investments.

I know when I think about solvency of the system, 

I think first independently of personal accounts. I think 

that what we should strive to do is to eliminate those 

permanent deficits without the use of general fund revenues 

if we can. I think that is what Roosevelt had in mind when 

he talked about having a self-financing system.

And so, it seems to me very, very important to 

distinguish between the idea of not having a permanent 
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general revenue flow, which is the drain on the treasury, 

and a situation where you have a temporary deficit perhaps 

to finance an investment followed by surpluses where over a 

period of time -- and I won't get into how long that might 

be yet. But over some period of time the deficits are 

balanced out by the surpluses, so the system is selfsustaining.

MR. PARSKY: I was just going to add one comment, 

and that is that I think John is right about certain policy 

alternatives would allow us to do that. And when I was 

referencing the possibility of treating under some systems 

it as a loan, the surpluses that would be created under what 

you suggested could serve as a resource to repay that loan, 

so that you might achieve exactly what you want. I think 

that is a very good point.

CHAIRMAN PARSONS: Gwen.

MS. KING: Thank you, Mr. Chairman. I am starting 

to feel like, the frustration you feel at a movie where two 

people keep passing each other and you keep waiting for them 

to meet.

MR. PARSKY: How many different commissions do we 

have on social security? Maybe that is kind of at the heart 

of this.

MS. KING: There is a sense, on my part, because I 

did not work with the fiscal group, that you guys have 
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something more to share. We are not getting to it. Maybe 

our questions are holding back. But I do not know about the 

rest of the people in this room, but I want to know how you 

get from where we are to where we need to be.

MR. JOHNSON: Along this line, let me ask a 

question, and try to put it in --

MS. KING: Sputter, sputter, sputter.

MR. JOHNSON: Let me try to put it in simple 

terms, and see we can get this. What we are trying to do is 

to provide a sustainable system or a system that is 

currently not sustainable. So, what we have suggested is 

that the private account approach will provide greater 

sustainability than not private accounts, right?

But no matter what we do, even with that system, 

if you go to your point three, there will be a reduction in 

benefits as related to the growth in the GDP. So, somewhere 

along the line, if you take the idea that the first cohort, 

the near retirees and retirees, will get what is so-called 

promised today. But that second group will see some 

reduction in benefits as proposed today.

MR. BROWN: Let me speak to this for a moment. 

You are absolutely right that personal accounts can be very 

useful in this regard, but that even with that you have a 

basic issue that either the income line needs to rise, or 

the cost line needs to fall.
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And one thing to keep in mind when it comes to 

talking about what that means for benefit levels for 

individuals is that in the current system the benefits that 

are indicated by that red line are not currently paid for. 

These are benefits that are sort of written into law, but 

which we cannot pay for.

So, an important question is, what is the right 

basis for comparison when we think about the benefits that 

we are going to have under a reformed system versus the 

current system?

Should we compare it to a level of benefits that 

cannot be currently paid for, or it is a level of benefits 

that are actually payable under the current system?

I should also note that implicit in this because 

of the way the benefit formula works, that by the end of 

this valuation period 75 years from now the average benefit 

being paid out in social security in real dollars today, 

even after adjusting for inflation is on the order of 

90 percent higher than what those benefits are today. So, 

there is a lot of room here for --

MR. JOHNSON: Today or projected?

MR. BROWN: Than what today's retirees receive.

MR. JOHNSON: Okay.

MR. BROWN: Than what today's retirees receive.

MR. JOHNSON: Right.
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MR. BROWN: Real benefits are expected to close to 

double over the period that we are talking about here. So, 

there is an awful lot of room here to continue to allow for 

benefit growth in real terms, and to allow a system to 

deliver higher benefits than what today's retirees are 

getting, to deliver higher benefits than what is actually 

payable under current law; even though, obviously, if you 

are going to reduce the overall rate of benefit growth that 

you are slowing the rate of benefit growth relative to what 

is implicit in that red line.

MR. JOHNSON: But a final question. But within 

that period there still would -- it would still be necessary 

for some government transfers into the system to sustain its 

viability, as you describe it there?

DR. MITCHELL: Can I just speak to that 

momentarily? I mean, I think that there is commonly 

perceived -- many have the view, our critics certainly have 

argued, that personal accounts necessarily make the hole 

deeper. And I really think we have to reject that, that is, 

a hole already there. It is a very big hole. And if we are 

going to move towards sustainability, the hole needs to be 

reduced, needs to be filled.

Personal accounts can make the situation better. 

You know, in my nightmares I might imagine a personal 

accounts which will make it worse, but we are not going 
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there. So, personal accounts are not a panacea. They do 

not get rid of the hole on their own, but they are a 

mechanism to do all kinds of other good things that we 

talked about this morning.

So, that was really what I wanted. I wanted to 

support Jeff and say further they can be a mechanism to help 

us, but they are not going to get rid of the hole by itself.

DR. JAMES: Could I just add to that? Suppose 

that personal accounts, in fact, got you to sustainability 

at the end of the period. In between we would have the 

following problem if the personal accounts were financed by 

a redirection of some of the money now going in.

Temporarily they would have to fill in that hole, 

and that is where we could use general revenues temporarily 

to fill in that hole. Later on, we would be in better 

shape. But we would have -- and that's the transition cost 

problem to solve the transition cost problem. It is very 

likely that we will have to --

MR. JOHNSON: Yes, I guess the question I am 

asking. Should the person who is 12-years-old, 15-years-old 

expect that at some point they will have to bear an 

increase, tax increase, to maintain the viability of a 75 

year social security system?

CHAIRMAN PARSONS: The answer to that question is 

it depends. Let me go back to where Gwen was. It depends 
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on what you propose.

MR. JOHNSON: Yes, I understand that.

CHAIRMAN PARSONS: Where Gwen was and the 

frustration you are experiencing is because the subgroup has 

not yet gotten to the point that we are coming forward with 

specific hard proposals that answer all of the questions. 

What we know, or what we discern, what we believe is that 

the current system is unsustainable on its current course 

for the reasons we have discussed.

What we also believe is that while adding a 

personal account element to supplement the current system 

will help, as Olivia puts it, fill in the hole. It won't 

fill in the hole completely. In order to fill in the hole 

more completely, we are going to have to do something more.

We are either going to have to increase the future 

growth of benefits, add additional revenues, whether they 

are general revenues or some other kind of revenues, or a 

combination of the two. And what the committee is saying, 

the subcommittee is saying is that we are at that point now 

of working through that something else down both of those 

variable lines.

And, presumably, Olivia and John, by the 29th, by 

the next meeting of this commission, we will be prepared to 

come to the full commission with some specific 

recommendations or alternative plans as to how you now 
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combine these two concepts, personal accounts plus other 

action to bring us to a place where these six objectives we 

can say have been met. Is that fairly stated?

CO-CHAIRMAN MOYNIHAN: Mr. Chairman, may I 

introduce a cautionary measure here to get us going?

John Cogan mentioned that President Roosevelt 

brought Professor Edwin Witty from the University of 

Wisconsin to devise this program, and he saw this long-term 

deficit. And so, Witty just wrote in a few lines about, 

well, it would have to be individual annuities one of these 

days.

One of these days has come. Witty's assistant at 

that time was a graduate student named Bob Myers, a 

distinguished predecessor of Steve Goss. It is almost 75 

years later. Bob Myers was executive director of the 

Greenspan Commission, and at this very moment he is working 

on this problem. He is available to us for any thoughts he 

might have. But if you do not get yours to us by 

November 29, consider the fates might determine that 75 

years hence you will still be working on the problem.

MR. PARSKY: Just one thing to add. I think you 

have pointed out, Dick, that there are a lot of choices. I 

do not think there is silver bullet that says this is the 

way to get there. And there are choices within what a 

personal account would look like, for instance, whether or 
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not people would be required to contribute money or not 

contribute money as a match.

There are a whole series of issues that would 

create variables in that category. And then, there are a 

series of issues that will create variables for those 

people. And I think everyone is in concurrence that the 

personal account program should be an option.

You can assume that everyone will take it if you 

would like, but I am not sure that that is totally 

realistic. So, you have to deal with what happens to those 

people that do not take it. And within that, there are a 

variety of approaches.

And so, I think we may be hard pressed not to lay 

out a series of those options of approaches so people can 

see the policy tradeoffs you are talking about. And I did 

notice in these fiscal sustainability objectives that there 

was not an objective, and maybe because it is not totally 

achievable in any of the options of eliminating that gap 

That is not one of these.

So, that does not mean we cannot discuss it and

try to include it, but that was not here. So, we definitely 

want to improve as much as possible, and move the ball 

forward down the playing field. But I do not think we would 

violate these objectives if we did not obtain absolutely 

parity between those lines.
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CHAIRMAN PARSONS: Although, as I read item 1, at 

the end of the day we want to get the system back on a 

course that it could sustain itself going forward.

MR. PARSKY: Yes, that is true. But, again, there 

will be choices in terms of how you may or may not do that, 

and at what point and time.

CHAIRMAN PARSONS: Again, I think we have probably 

beaten this up pretty good unless Tom --

DR. SAVING: Well, one minor thing. Jerry, in 

fact, in our interim report, we did have the thing that 

eliminated this deficit. It was called payable benefits. 

Benefits payable eliminates -- nobody likes benefits 

payable, but it eliminates the deficit.

MR. PARSKY: There may be a choice that nobody 

likes that we also layout.

CHAIRMAN PARSONS: That is probably where we will 

come down. But let me suggest that we wanted to kind of 

debate around the issues. And I thank you, Gwen, and Bob, 

in particular, for sort of poking at where we are. And I 

think this subgroup, like the administration subgroup, still 

has work to do. This is the state of our thinking.

I think if there is "news" here, it is that we are 

not now thinking that the subgroup will propose to the full 

commission, and ultimately the full commission will propose 

to the president a "silver bullet," but rather different 
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approaches have different policy tradeoffs baked into them. 

 But we do not have those fully developed yet, and I suspect 

we will debate those at our next meeting on the 29th.

But just to kind of conclude, by putting this in 

the framework again, so that people can understand. I mean, 

this has been pretty dry and pretty down in the weeds. But 

it is a huge issue. I want to make reference to something 

that has already been, at least, tangentially touched on, 

you know, the events of September 11th.

You know, on that day, you know, this country was 

attacked and we now find ourselves at war. It is a 

different kind of war than we have had heretofore, but is 

war nonetheless. And it is a war that I think people are 

beginning to understand now could go on for quite some time, 

and demand quite a level of resource commitment from this 

government.

And while there are those who currently wonder 

whether we have the resolve and the will to hang in there 

until this thing is over, you do not see anybody writing 

stories about or questioning whether we have the resources 

to do it, whether we have the financial capacity to do it.

And, you know, in business you call that having a 

strong balance sheet. You do not run your business in such 

a way that you are so straining every revenue generator all 

of the time, that if something unforeseen happens you cannot 
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respond.

You run your business in a way that you always 

have some dry powder, a little gas in the tank, in case 

something comes along that you have not anticipated that 

requires a response, that requires more resources. And that 

is the strength of this country.

We have the ability to crank up our productive 

machine and respond to extraordinary circumstances like 

those we are faced with now. The problem that we are 

facing, the problem that that chart is evidencing, is that 

30 years from now if we do not do something to fix the 

social security system, we are not going to have a strong 

balance sheet.

All of the excess capacity of this country is 

going to be going to providing benefits for people who have 

been promised a level of benefits we currently cannot pay 

for, and we will have to increase the level of taxation, or 

decrease the amount we spend on the rest of the government 

to cover those promises. That is the problem we are facing, 

and that is the problem that needs to be addressed.

Now, I mean, the discussion this morning about 

private accounts is relevant because one of the ways you do 

that is you start saving money now instead of waiting for 

some future time, but then call down that money from current 

revenues. You start putting money in the bank now, and that 
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is what private accounts is all about.

It is not just so individuals have individual 

wealth. It is so they won't be looking to the government 

and to the taxpayer to provide that level of support 30 

years from now when we may need it for something else.

But the other part of the equation, Jerry, is what 

you were talking about. We have to find a way of putting 

the system on some sustainable basis where the amount going 

out matches up with the amount coming in, and we can keep 

the strength of our balance sheet for whatever the 

emergency, or the exigency, or the need is 30 years from now 

instead of having all of the resources flow into supporting 

an aging population.

So, we take the charge seriously. We think it is 

more relevant now than it has been. These subgroups are 

working hard to come back to the full committee with 

specific recommendations or ways to get there, both on the 

private account side, and on modification to the benefit

rates.

We hope, as Senator Moynihan said earlier, we will 

probably in a concluding mode within a month. We have two 

meetings between now and the time we conclude. And we hope 

that the recommendations we come forward with will be viewed 

in the context of that larger picture, that this is not 

about politics.
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This is not about or should not be about trying to 

gain next year's election, or a future year's election. It 

is about preserving the strength of the balance sheet of 

this country and making promises to people that we have 

confidence we can keep.

(Applause)

MR. VARGAS: Mr. Chairman, in that spirit, we have 

done a lot of work to this point before the meeting, and I 

think we got a lot accomplished today. And it is obvious we 

have a lot more to do. So, in the interest of letting us go 

and do that, continue to do that work, I motion to adjourn.

MR. PARSKY: Second.

CHAIRMAN PARSONS: So moved. Any objection?

(No audible response)

CHAIRMAN PARSONS: Hearing none, we stand 

adjourned.

(Whereupon, the meeting was adjourned at 3:05 

p.m.)