February 22, 1998

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

Dear Senator Gregg:

We want to thank you for your prompt response to our last letter, and for sharing this response with all the members of the House and Senate. We also appreciate your generous offer to forward our request for projections on stock returns to the Social Security Administration. We have attached a letter that specifies the precise information we are requesting.

However, we do have to take issue with two of the points in your letter. First, you assert that the assumptions used in your plan and the assumptions published by the Social Security Trustees are "one and the same." In fact, the assumption concerning stock returns used by the Social Security Advisory Council, which you indicated was the basis for the calculations used in designing your reform plan, is very different from the assumptions that appear in the Social Security Trustees' Report. The assumptions for wage growth, population growth, life expectancy and other relevant economic and demographic variables that appear in the Trustees Report are subjected to a high degree of professional scrutiny, both individually, and for their mutual consistency. Expert panels of professional economists, demographers, and actuaries are appointed to review these assumptions at regular intervals.

The assumption of a 7.0 percent real return on stocks in the Advisory Council Report has not been analyzed in the same way. Since the Council wanted to evaluate proposals for incorporating stock ownership in their reform proposals for reform, they needed a projection of stock returns from the Social Security Administration to provide the basis for their calculations. As you know, stock returns had never previously been a relevant factor for the Social Security system, so the Social Security Administration had no experience in this area. They came up with the 7.0 percent projection based on a brief examination of the literature in this area. This is very different from the rigorous methodology by which the assumptions and projections of the Trustees' report are produced, and it is for that reason we have asked for detailed projections on stock returns.

Our second point is that the difference between the 7.0 percent return assumed in your proposal and the 3.5 percent return that we believe is consistent with the other projections in the Trustees Report is far more than a technical detail. With a 7.0 percent rate of return, at the end of forty years, an average wage worker, who currently earns just over $27,000 a year, would have accumulated $128,400 if they put 2.0 percent of their wages in the stock market each year. By contrast, with a 3.5 percent rate of return the same worker would have accumulated only $54,400. To our mind, this is a big difference to a typical worker. (Both figures are in today's dollars, they assume no administrative costs and therefore significantly overstate the true return that a worker receive in either case.)

We believe these points of difference are worth calling to your attention. You raised other issues where we disagree in your letter, but these are best dealt with in other contexts. We are again thankful for your passing along our request for data to the Social Security Administration. We look forward to your letter and to the response from the Social Security Administration. If your intervention results in the adoption of more realistic assumptions about stock returns, you will have made a tremendously valuable contribution to the debate.


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)