United States Senate
Washington, D.C. 20510-2904

January 25, 1999

Dean Baker
Mark Weisbrot
Preamble Center
1737 21st Street, N.W.
Washington, D.C. 20009

Dear Dean and Mark:

Thank you for your letter of January 22, regarding Social Security reform proposals. I appreciate the opportunity to respond.

In your first paragraph, you state that proponents of individual account proposals "conventionally assume that money from these accounts which is invested in the stock market will earn a considerably higher real rate of return, usually 7.0 percent a year, than that available from government bonds." You further go on to state that "it seems incumbent on the proponents of such plans to produce an equally detailed description of their assumptions on stock returns."

I am pleased to do so. You will find the assumptions on page 171 of Volume 1 of the 1994-96 Social Security Advisory Council report.

I would hasten to point out that the plan I have sponsored remains solvent regardless of the rate of return that individuals receive on investment in stocks. This is not true of some other personal account plans, nor is it true of plans that would invest the Social Security Trust Fund in the equities market. In its December 1998 report the Congressional Research Service found that when the same conservative rates of return that were employed under our plan were also applied to the Ball plan, the latter failed to reach solvency. It is the government investment plans, much more frequently than the personal account plans, that rely explicitly on high rate of return assumptions to bridge Social Security's solvency gap.

It seems fair, therefore, to interpret your letter as indicating that you would oppose the plans from Robert Ball, Henry Aaron, and Robert Reischauer, which rely specifically upon higher assumed rates of return from government investment in stocks in order to produce a solvent Social Security system. If, as your letter indicates, you oppose reliance upon such assumptions, it must therefore be the case that you have a plan to enact the requisite changes in benefit or tax levels to restore the Social Security system to solvency without such redirected investment.

I herewith enclose a detailed synopsis of the annual cash-flow characteristics of both current law and the proposal that I introduced with John Breaux, Jim Kolbe, and Charles Stenholm, under the assumptions employed by the Social Security Actuaries. If you would provide me a similar level of detailed analysis of your own proposal, I would be pleased to circulate it among my colleagues in the Senate.

I would ask that you give particular attention, in doing so, to the most vexing element of the Social Security debate, which pertains to the gaps between revenues and outlays during the "drawdown" years of the baby boomers' retirement, the 2020s and the 2030s. Under current law, for example, the gap between Social Security's revenues and outlays in the year 2030 can only be filled if a cash payment of $684 billion is made from general revenues to Social Security (both the Gregg-Breaux-Kolbe-Stenholm and the Moynihan-Kerrey proposals eliminate the vast majority of these gaps, the former plan by pre-funding Social Security liabilities through personal accounts, and the latter by moving explicitly to pay-as-you-go financing.) Many proposals that purport to attain actuarial solvency" leave these enormous gaps in place and leave unanswered the question as to what will be the source of the tax increases necessary to make these payments. If your own favored solution would continue this situation, I would ask that it specify the tax increases you would enact within general revenues in order to meet payments to beneficiaries. Doing any less is to leave out the largest piece of the puzzle.

In your closing paragraph, you make a comment about a rate of return assumption that "does not deserve to be taken seriously in the Social Security debate." In fairness, you should note that most plans that include personal accounts, including the Gregg-Breaux-Kolbe-Stenholm plan, the Moynihan-Kerrey plan, the Ned Gramlich plan, and the Schieber-Weaver plan, remain solvent regardless of what rate of return is assumed because there is no explicit relationship in these plans between stock return assumptions and system solvency. This is not true of some alternative personal account plans and is certainly not true of the Ball or Aaron-Reischauer plans. Your comments, therefore, miss the boat when they focus on personal account plans only.

The real element that "does not deserve to be taken seriously" is any proposal that purports to attain actuarial solvency but remains silent on the question of how the general government will pay off a multi-trillion-dollar Trust Fund, if such a plan does indeed rely on such an action. I am confident that you will meet this standard and will forward with your proposal an exact accounting of the general revenue increases that you propose to redeem the Social Security Trust Fund, at whatever size it rises to under your proposal.

Again, thank you for contacting my office; I appreciate having the opportunity to respond to your concerns. If I can be of further assistance to you, please do not hesitate to get back in touch with me.


Judd Gregg