The government will be able to act as guarantor of investment performance (or contract the job out 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, at 25% and 1500% returns respectively ($50 and $600 on the chart). The guarantee would make good on any returns less than the floor. The excess of returns above the ceiling would go to the government as collector of premiums to build reserves.
Beyond a certain level of reserves, refunds can be distributed to all workers participating in the plan, or the floor or ceiling levels may be adjusted, or funds may be used to meet other safety-net needs--those related to early disability or premature deaths leaving dependent children. Since 1870, the floor has never been reached. The ceiling has been exceeded 40% of the time. Those are superb odds for the government which harvests each excess.
The Burden of Proof for Private Accounts
Finally, the burden should be on the opposition to prove why these pension-savings accounts should not be the personal private property of each worker in the United States. 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."
Democrats and liberals should pay special heed to this essential feature of the optimum government-legislated pension plan. Paradoxically, it can and will establish one of the biggest social wealth-redistribution plans afoot in the United States since the origination and growth of the federal income-tax code. Further, the lower down the social-economic scale the worker labors and lives, the greater will be the financial benefits that accrue to him or her and their families.
With private accounts under this plan, longevity does not matter. You can live as long as you like. Your benefits, guaranteed, 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 as necessary to complete the process. In the new plan, safety-net benefits related to disability or early death leaving dependent children behind should be funded by borrowing in the credit markets until sufficient reserves and actuarial experience accrue. Until then, a moderate premium charge against contributions may be levied to build reserves and amortize specific related debt. This provision of the new law must have a biennial sunset feature by which it expires automatically unless extended by new legislation. Safety-net benefits may be set at some fixed multiple of median wages or average annual consumer spending.
There will be a hurdle transition period during which federal borrowing may be substantial. It will look like a bell curve, tailing off finally to nothing at the end of 60 to 70 years. The advantages at the end period will be that the new plan is fully funded and will remain so indefinitely for all succeeding generations of participants.
The President's excessive caution on the initial limit of stocks to be voluntarily allowed is inappropriate. Up to 100% (less a minor premium for safety-net reserves) should be permitted. The program is voluntary. Why restrict the freedom of choice of the owners? Especially when the odds are so favorable--for everybody, but specially those at lowest wages--and the specified retirement benefits are guaranteed for all participants.
Posted August 7, 2005
Amended April 2, 2007
Milton Friedman called the previous article upon which this one is based "fascinating and the conclusion suggested by (the) calculations striking. . . a very informative set of calculations." Click here for Complete Previous Article with proofs, sources, notes, and tables
that underlie the historic examples used here