Social Security official: Promises can't be met

That's how America got into the fix that will see the Social Security trust fund run out in 36 years unless something is done, according to James B. Lockhart III, deputy commissioner of the Social Security Administration.

On a recent visit to the Manchester SSA office, Lockhart sat down with the Sunday News to discuss the coming Social Security shortfall. These days, he spends a lot of his time on the road, sounding the alarm and pushing the administration's reform ideas.

Earlier jobs During the first President Bush's administration, from 1989 until 1993, Lockhart was executive director of the Pension Benefit Guaranty Corp., the federal agency that insures the nation's private pension plans.

"They used to call me Chicken Little back then," he said. In those days, Lockhart was sounding the alarm about an underfunding crisis in private pension plans.

Last May, a federal bankruptcy judge allowed United Airlines to turn over its employees' pension plans — underfunded to the tune of $9.8 billion — to the PBGC. It was the largest corporate pension default in U.S. history.

"I think people overpromised," Lockhart said in an interview at the SSA office. "If you look at the PBGC world, what happened was that companies . . . and their unions bargained for more than the company could afford, and the unions took it because they knew there was PBGC insurance."

Back then, Lockhart put out a list of the top 50 underfunded companies to make his point.

Now he is trying to get the public to pay attention to a similar underfunding problem with the Social Security system.

"There are some people that argue maybe Social Security has promised too much, just like the defined benefit world, and we can't afford that promise. And we can't."

Numbers growing "The number of retirees is going to double in the next 30 years as the Baby Boomers retire. You've got these pressures coming very quickly, and we need to do something.

"With Social Security, we still have an opportunity, if we take action in the next few years, to create something that will be good for the next generation," Lockhart said.

But how can the administration ask the American public to make sacrifices — work longer, accept lower benefits or pay higher taxes — when Congress essentially has raided the Social Security trust fund for years to pay for other government programs?

And it may not get any easier next year, with mid-term elections coming up, he said.

Lockhart said proposed solutions to the funding problem fit into three categories: Increasing taxes to pay for benefits — that could include raising or eliminating the $90,000 ceiling on Social Security earnings; reducing benefits, such as reducing payments or increasing the retirement age; and private investment, shifting some of the responsibility for saving from the government to individuals.

Lockhart said President Bush's proposal is to allow individuals to invest up to 4 percent of Social Security taxes (which amount to 12.4 percent of earnings) up to $1,000 a year, in personal investment accounts. There are also at least a dozen proposals making their way through Congress.

Tough call Lockhart said Bush's plan favors a "very simplified" system, modeled on the Federal Thrift Savings Plan offered to senators and congressmen, to include just a few choices of bond funds or stocks in which individuals could invest. That program recently added a so-called "life cycle" fund that automatically reduces the investment risks the closer folks get to retirement age.

One problem is that Americans just do not save enough for their own retirement, Lockhart said. And he said, "Maybe part of the reason is people expect too much of Social Security."

About one-third of retirees today get nearly all their income from Social Security, he said. Part of his agency's challenge is getting out the message that future retirees can no longer expect to rely solely on Social Security to live comfortably.

Cuts are needed SSA projections show benefits would have to be cut drastically — by 26 percent beginning in 2041 and by 32 percent by 2080 — unless something changes, Lockhart said. "The worst case scenario is we do nothing about Social Security, and our kids' benefits are cut 32 percent after paying in a lifetime."

Actually, that "cut" looks more like today's level of benefits. According to SSA projections, a monthly benefit today of $972 is scheduled to increase to $1,400 for someone born in 1983 and retiring in 2045. But the system will only be able to afford to pay out $1,037 in 2045, and that's where talk of a projected 26 percent "cut" comes from.

So why not just begin now, lowering expectations of the younger generations about what their future benefits will be, instead of trying to fully fund an increasing level of benefits?

Lockhart contends there will always need to be a safety net for lower-income workers who cannot afford private investments. And for higher-income people, he said, "Their benefits will be slowed down dramatically, but they will have the opportunity for personal retirement accounts."

"Social Security is still there as a safety net for the American people. There is that defined benefit portion of Society Security that really protects the lower income, and above that, there is an account related to Social Security that's some form of personal account that people can control, own, it's inheritable — and it's not being borrowed by the government."

In the meantime, there is an urgent need for bipartisan compromise on this all-important challenge, the deputy commissioner contends. "There really is room for people to work together."

But that will mean taking some of the politics out of it. "And that's what I hope will happen," he said. "Lower the rhetoric and hopefully get some solutions."

You may be interested in reading the article my friend John had published in Barrons magazine at the end of November. If you know of others that might like to read it, please ping them:

http://online.barrons.com/article_email/SB113296322149106958-lMyQjAxMDE1MzIyODkyNjgzWj.html
MONDAY, NOVEMBER 28, 2005 JOHN P. MEEHAN is co-founder and emeritus chairman at ICC Capital Management in Orlando.

Investment for Social Security
By JOHN P. MEEHAN

SOCIAL SECURITY REFORM HAS DISAPPEARED with the president's plunging approval ratings in the polls. What happened? Well, the president and his advisers delivered the wrong message and shrugged off criticism without counterattacking.

President Bush promised to reduce existing benefits in exchange for the uncertainty of future returns from private investments. That looked like a bad bet. The public saw that, and they and their elected representatives rejected it soundly.

Then the White House did nothing to reassure seniors and soon-to-be seniors. There was no counterattack to the partisan scare tactics that shocked and frightened older voters -- the threat that "your present benefits will be curtailed."

Also, the message wasn't focused. It was a strategic blunder not to set at the outset a complete and exact plan that could be argued on the merits.

What has been missing are three imperative, definitive features: a clear, vigorous assertion and incontrovertible proof of the power of stock returns and their surprising lack of embedded risk; inviolable private ownership of retirement assets; and government guarantee of a financial safety net for disability and dependents of workers dying in the prime of life.

If only some visionary member of the president's Social Security commission had said, "What if there were no existing program? What would we design as a brand new system for maximum retirement benefits for all workers and their families, at little or no cost to the government, starting next year?"

The first step would be to identify those investments with the highest returns and the fewest risks. The return part is easy. Stocks are the clear-cut answer. Risk is trickier, but manageable.

Although corporate pension funds rely on them, there's a widespread political opinion that stocks are too risky for pensions, especially pensions sponsored by the exemplar of fiscal probity, the U.S. Congress.

In stock investing, risk is the possibility that prices will be lower, sometimes a lot lower, than they were when shares were purchases. This is most devastating when it comes when the owner wishes to sell and cash out. The other side of that coin is that stocks may be higher, a lot higher, and cashing out at the time of retirement can mean wealth, possibly great wealth.

Investors also face volatility, which shakes them with alternative paroxysms of exuberance and despair. This is not what most people want at a time when they enter the tranquil years of their retirement. Yet time itself soothes this beast. The longer it is confronted, the tamer it becomes. In every 40-year period since 1870, a broadly diversified portfolio of stocks has returned at least 233% of stock-invested pension money at retirement age.

Results like this make it easy to legislate a government guarantee for a minimum benefits level, based on 130 years of U.S. financial history. Even in 1974 (a seriously bad year for the stock market), a retiring worker would have had a stock portfolio worth $421 after a total cumulative investment of $40, yielding a return of more than 900%.

This year's median wage-earner made $33,748. Over the next 40 years, taxes for retirement at 12.4% of wages will total $100,000, assuming 3% wage inflation. At the end, those deposits would generate a private account worth an estimated $4 million, in constant dollars. The account can then be converted to an annuity or allowed to continue intact with an annual selected percent-benefit distribution.

The government will be able to act as guarantor of investment performance (or outsource the job to the private sector), based on the statistical probabilities inherent in the experience to date since 1870. A floor and ceiling can be set -- say, 25% and 1,500% returns, respectively. The guarantee would make good on any returns below the floor. Any return above the ceiling would go to Uncle Sam as the collector of premiums, to build reserves. Beyond a certain level of reserves, refunds should be distributed to all workers participating in the plan, or the floor or ceiling levels could be adjusted, or funds might be used to meet other safety-net needs -- related to early disability or to premature deaths of plan participants, survived by dependents.

If this program had been operating in the U.S. since 1910, the floor would never have been reached. The ceiling has been exceeded 40% of the time. Those are superb odds for the government.

The burden should be on the opposition to prove why Social Security benefits shouldn't be the personal, private property of each U.S. worker. The president said in his May 2001 Rose Garden announcement, "Personal savings accounts will transform Social Security from a government IOU into personal property and real assets; property that workers will own in their own names and that they can pass along to their children. Ownership, independence, access to wealth should not be the privilege of a few. They're the hope of every American, and we must make them the foundation of Social Security."

What he didn't say and should have said is, "Here is the complete set of plans on how to do it." That would have let partisans address specifics and not left them free to make up their own disasters.

Those interested in redistributing income should consider private ownership an essential feature of a government-legislated pension plan. It would establish one of the biggest social wealth-redistribution plans in the United States, since the institution of the federal income tax. The lower workers are on the socio-economic scale, the greater the relative financial benefits that accrue to them and their families.

With such private accounts, longevity doesn't matter. You can live as long as you like without endangering your benefits. Guaranteed, they belong to you, and after you, to your family, with no strings attached.

The old system should be allowed to run out completely, paying all promises on the books now. Borrow if necessary to complete the process. In the new plan, safety-net benefits related to premature disability or early death and dependents should be funded by ad hoc borrowing in the credit markets until sufficient reserves and actuarial experience accrue. Until then, a moderate premium charge may be levied to build reserves and amortize related debt. Safety-net benefits may be set at some fixed multiple of median wages or average annual consumer spending.

President Bush didn't think big enough. The pittance of Social Security tax he would have allowed citizens to set aside for stock investing was inappropriate. Up to 100% (less a minor premium for safety-net reserves) should be permitted. Why restrict the freedom of choice of the owners by limiting the amount they can allocate to equities? Especially when the odds are so favorable for everybody, and the retirement benefits are guaranteed for all participants.

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