By ARTHUR LEVITT JR. Mr. Levitt is a former chairman of the SEC. April 26, 2005;
President Bush's proposal to create private savings accounts out of traditional Social Security has inflamed political passions on both sides of the aisle. One perspective, however, has been shortchanged in debate: Although this may be the single biggest change in a generation in how Americans save for retirement, few have looked at the plan through the eyes of the investor.
One of the most remarkable developments that I have witnessed over my 40 years working in and around Wall Street -- a trend I saw accelerate during my tenure at the SEC -- was the opening up of our capital markets and the accompanying potential for wealth creation to millions of Americans. The president's Personal Savings Account plan promises to give millions more the opportunity to join this investor class. It stands to boost overall financial literacy and could encourage Americans to invest and save more.
But as any financial planner will tell you before committing to any investment option, a plan needs to be judged ultimately by its risks, its potential returns, and how the mix of the two fit the goals of an investor. As currently structured, the PSA plan avoids some of the pitfalls seen when the U.K. undertook a similar reform almost two decades ago. In particular, by limiting investment options and placing its administration in the hands of the federal government, this plan would curb the potential for excessive fees, fraud, and shady sales practices. In addition, by making the default investment for these accounts a life-cycle fund that is both diversified and adjusted to reflect an investor's changing tolerance for risk over their lifetime, the PSA plan decreases the likelihood that novice investors will make spectacularly bad choices.
Yet there are other, more fundamental, aspects of the PSA proposal's structure that merit serious concerns: The funds deposited in a PSA account are not free money. Every dollar you take out of traditional Social Security and put into a PSA must be paid back out of your Social Security benefit -- plus interest. If this sounds a lot like margin investing, it should not be a surprise since the PSA plan is modeled on that concept: A worker investing in a PSA would hope -- like a margin investor -- that assets accrued were greater than debts (money lent plus interest). If not, he would end up with a smaller Social Security benefit than if he stayed in the traditional system. To come out ahead, then, an investor would have to earn a rate of return that exceeds the interest of the loan, plus expenses.
Could one make this return within an acceptable degree of risk? According to a study by Robert Shiller of Yale, the answer is: not that often. Using adjusted stock market data to reflect the expected decreases in future market rates of return, he found that investors would do worse in the default life-cycle portfolio of the PSA accounts than in traditional Social Security 71% of the time, leaving an average worker with $2,000 less in annual benefits. Even if one opted out of the default and decided to invest entirely in stocks, this riskier strategy would not guarantee coming out ahead: Prof. Shiller predicts a worker would lose money 33% of the time.
Borrowing against one's Social Security to invest in the markets is a risky strategy that would only make sense for certain high net-worth investors who can afford to lose their entire investment. Prof. Shiller's calculations demonstrate that for the majority of workers who make less than $50,000 a year, the PSA is not a good investment not just because the odds of coming out behind are high, but also because these investors very likely may have nothing to fall back on if they lose that money.
While I do not think that his PSA plan is a good deal for investors, opponents must give President Bush credit for bringing this discussion about Social Security's future to the fore. There is a long-term financing problem, and we should make the tough decisions now so our children won't have to. We also should follow his call to encourage Americans to save and invest more, and there are steps we can take to do this that do not imperil Social Security's solvency:
• First, by switching the default option for 401(k) participation to automatic enrollment, we could boost participation in these plans to between 85% and 95%. Also, we can steer workers out of risky and costly investments and boost retirement savings for millions by setting the default investments for 401(k) plans to low-cost, diversified index funds -- a smart way to begin.
• Second, for those who are not offered 401(k)s, the IRS should permit taxpayers to split their tax refund into more than one account. As the Brookings Institution's Retirement Security Project notes, with the average tax refund amounting to about $2,000 or 5% of median income, refunds can be a large source of savings. Right now, taxpayers can have the IRS directly deposit a refund into one bank account. Yet, many people need a portion of this money immediately so they choose to save none of it in a retirement account. By allowing taxpayers to split their refunds, we would enable them to deposit a portion in a checking account to cover immediate expenses and a portion in a tax-preferred savings account for retirement.
• Third, Congress should make it easier for companies to provide unbiased, third-party financial education. Currently, most employers avoid giving investment advice in order to avoid exposing themselves to fiduciary liability. Congress should explore clarifying the provisions of the Erisa law to encourage employers to provide much-needed, non-conflicted investment advice.
These proposals to boost retirement savings enjoy bipartisan support. Congress should move on solutions such as these, and then work on a separate track with the administration to devise a plan of sensible changes -- such as increasing wages subject to the Social Security tax, adding newly hired state and local workers to the Social Security system, or improving the long-term fiscal health of the country -- that can guarantee Social Security's solvency for decades to come.
I have spent a good deal of my life encouraging Americans to become investors, yet I don't believe Social Security is the way to do so. For me, this is a financial question as much as it is a philosophical one. As a society, are we prepared to replace the basic, guaranteed retirement benefit of Social Security with the potential of greater risk and -- to be fair -- greater reward of an investment account? Let's keep Social Security intact, and at the same time, encourage more Americans to invest for their retirements. We can do both.
More on Social Security, this time local. The Saratoga Springs town meeting was a big success with 125 attendees, standing room only. The only empty chair was on stage, and reserved for Congressman Sweeney, District 20, who did not make an appearance. This is what the Albany Times Union had to say about it. Albany, N.Y. -- timesunion.com
Separation of Church and State, the basis of a healthy democracy because it avoids tilting the playing field towards the oppression of some over very divisive questions of belief, is being obviously subverted by opportunistic and coldly calculating politicians a la Bill Frist. As Bernard Henry Lévy reminded us in this month's Atlantic Monthly, the American people are entering the field of religious strife that the Europeans had put behind them a couple of centuries ago. Today's Frank Rich column is juicy and to the point. The New York Times > Opinion > Op-Ed Columnist: A High-Tech Lynching in Prime Time
From England this portrait of the Tony Blair Labour achievements. I have included it because this lady has a way with words. At turns sarcastic, nostalgic and matter-of-fact, the scenes are vivid and compelling. Some of our illusions get lost in the reading: man is not good to man when desperate and good supervision, even if draconian, will improve the Hobbesian picture of life. The Observer | Review | My heartlands
Today, Paul Krugman explains why our medical system is so expensive comnpared to everybody else's. Private insurance based, the administrators are not concerned with the efficient delivery of care, but in risk avoidance, i.e. how to deny coverage to the most sick people. As a result the medical practitioner's daily battle is not with germs and disease, but with the insurance company. Who said that the great virtue of entrepreneurship is the willingness to take risks? The New York Times > Opinion > Op-Ed Columnist: Passing the Buck
If $2 per gallon gas has not shaken you yet, you better tighten your seat belt and start spitting into your gas tank, hoping the car will keep running. Of course it is not only your car you should be worrying about, but your heating and air conditioning, the saran wrap around your food, the coating on your surfboard, and yes, all the plastic gadgets that go into your body and health care.Guardian Unlimited | Life | The end of oil is closer than you think
When Paul Wofowitz was tapped to go to the World Bank, many of us saw it as "kick upstairs" for the inaccurate and unsuccesful policies leading to the Iraq debacle. However Naomi Klein disabuses us: Wolfowitz is only off to his next vision, an effort to finance the capitalistic rebuilding of disaster areas under the cloak of altruism. Once more the little people, fishermen, peasants, providentially ruined by the December tsunami, will now be pushed off their lands and shores to make way for resorts and shrimp farms, reshaping the coasts of Indonesia into playgrounds for tourists and international capital. Read on.... The Nation | Column | The Rise of Disaster Capitalism | Naomi Klein
Today's NYT has two columns that address two aspects of the same problem. As Friedman points out "It's as if we have an industrial-age presidency, catering to a pre-industrial ideological base, in a post-industrial era.". That the US standing, in anything but its military capacities, is plummeting in reference of the rest of the industrial world does not seem to concern President Bush, who feels, like General Franco before him, answerable only "to God and to History". While Bush spends political capital on privatizing Social Security, an ideological goal if there ever was one, many of the problems of adjusting our society to the needs of the post-industrial age go unattended. The country seems all effervescent about gay marriage, but unconcerned about the high poverty rate. This administration has grabbed all slogans, any slogans, to misrepresent the fact that its policies are regressive and not in the public interest. Elected representatives, like Tom Delay, put bluster before honesty. Not that there never was corruption in high places before, but the brazenness is prodigious. How long will it take before the backlash comes? The New York Times > Opinion > Op-Ed Columnist: Bush Disarms, Unilaterally
The New York Times > Opinion > Op-Ed Columnist: The Medical Money Pit We are so proud of our health care system! Or at least that is what we are told. Yet, as Krugman points out, we spend close to double what other advanced economies do, per capita, and our results are much inferior to theirs. Manufacturers in the USA are at a competitive disadvantage because they cover their employees' health through the present, insurance run, system. GM has such health liabilities that, if the present cost run-up continues, it will have to make a choice between not providing any company paid health insurance to its employees and retirees, or to go out of business. But the Bush administration keeps focussing on the much less dire predicament of Social Security. This, the most ideological and partisan of Administrations, does not care about finding solutions to problems, but wants only to shape an ideologically correct way to run the country into the ground. That's what I think.
Let us say that I have been around the block a few times. So I have learned that I don't know much, and that I think that I am smarter than I really am. But I would like you to hear about my take on the world, on my original country, this country, this campaign, myself, my life, your life and how I believe that you should live it.