January 28, 1998

Senator Judd Gregg
U.S. Senate
Washington, DC 20510

Dear Senator Gregg:

Thank you for your prompt response to our earlier letter. Unfortunately, your response did not include the accounting that we had requested. We had requested that advocates of individual accounts produce the same sort of detailed projections for stock returns (specifically, dividend yields and capital gains) as the Social Security Trustees produce for wage growth, interest rates, life expectancy and other relevant economic and demographic variables. The page you referred us to in the Advisory Council’s Report simply states the rate of return that was being assumed in subsequent calculations; it did not specify how it was broken down into its two components, nor how it might vary over this time period. This is not the sort of detailed projection that the trustees have considered necessary to make their projections on other variables that affect the soundness of program. You can find these projections on pages 57-61 of the 1998 Trustees Report. We believe that the public has the right to demand exactly the same degree of specificity on assumptions about stock returns, or any other factor that affects the soundness of the program.

You have correctly pointed out that the accuracy assumptions on stock returns also arises for those such as Robert Ball who have advocated investing the trust fund in the stock market. But, as you note, the fund is still liable for making full benefit payments under these proposals. This means that with a Ball type plan for collective investment, the government will be obligated to make up lost revenue if the market performs below expectations, but the retiree is not harmed. With a system of individual accounts, under such circumstances, the retiree will have lost much of their projected benefit, even though, as you point out, the government will be off the hook.

A paper authored by Dean Baker ("Saving Social Security in Three Steps," Economic Policy Institute, 1998), finds that under the plan you support and with realistic calculations of stock market returns, an average wage earner, retiring at age 65 in 2030, will lose 28.4 percent of his or her currently scheduled benefits (including the value of the annuity from the individual account). A low wage earner retiring at age 65 in 2030 will lose 23.8 percent of the benefits currently projected. The point of Social Security is to remove risk from the individual, implicitly transferring it to the government. It would not seem like an argument in support of a reform plan that it has accomplished the opposite.

The question of where we believe the risk should lie is of course a political one, and reasonable people can come to different conclusions. However, we do believe it is a matter of basic honesty that all the relevant variables be subject to the same standard of scrutiny. For this reason, we again request that a year by year breakdown of the two components of stock returns (capital gains and dividends) be produced, so that the public has a basis to assess their plausibility.

Thank you again for your prompt reply to our first letter. We look forward to your accounting of stock returns.


Dean Baker
Co-Director, Center for Economic and Policy Research
(formerly Senior Research Fellow, Preamble Center)

Mark Weisbrot
Co-Director, Center for Economic and Policy Research
(formerly Research Director, Preamble Center)