<html><body>A New Approach to Personal Social Security Accounts March 29, 2005 Unedited transcript prepared from a tape recording. <TABLE width="100%" border=0> <TBODY> <TR> <TD vAlign=top align=left width="12%">11:45 a.m.</TD> <TD vAlign=top align=left width="88%" colSpan=2> Registration</TD></TR> <TR> <TD vAlign=top align=left width="12%"> </TD> <TD vAlign=top align=left width="17%"> </TD> <TD vAlign=top align=left width="71%"> </TD></TR> <TR> <TD vAlign=top align=left width="12%">Noon</TD> <TD vAlign=top align=left width="17%">Luncheon</TD> <TD vAlign=top align=left width="71%"></TD></TR> <TR> <TD vAlign=top align=left width="12%">12:30 p.m.</TD> <TD vAlign=top align=left width="17%">Presenter:</TD> <TD vAlign=top align=left width="71%">Alex J. Pollock, AEI</TD></TR> <TR> <TD vAlign=top align=left width="12%"> </TD> <TD vAlign=top align=left width="17%">Discussants:</TD> <TD vAlign=top align=left width="71%">Allan H. Meltzer, AEI</TD></TR> <TR> <TD vAlign=top align=left width="12%"> </TD> <TD vAlign=top align=left width="17%"> </TD> <TD vAlign=top align=left width="71%">Rudolph G. Penner, Urban Institute</TD></TR> <TR> <TD vAlign=top align=left width="12%"> </TD> <TD vAlign=top align=left width="17%">Moderator:</TD> <TD vAlign=top align=left width="71%">Kevin A. Hassett, AEI</TD></TR> <TR> <TD vAlign=top align=left width="12%"> </TD> <TD vAlign=top align=left width="17%"> </TD> <TD vAlign=top align=left width="71%"> </TD></TR> <TR> <TD vAlign=top align=left width="12%">2:00</TD> <TD vAlign=top align=left width="88%" colSpan=2> Adjournment</TD></TR></TBODY></TABLE> Proceedings: MR. HASSETT:  I'm Kevin Hassett, Director of Economic Policy Studies here at AEI.  And I welcome you to the event entitled "A New Approach to Personal Social Security Accounts."  We have assembled a very distinguished panel to discuss an idea that has been put forward in an article that is in your packet, released today, by my colleague, Alex Pollack. Alex is relatively new to AEI.  He joined AEI as a resident fellow in July, 2004.  From 1991 until he joined AEI Alex was the president and CEO of the Federal Home Loan Bank of Chicago, where he made a significant amount of news by coming up with innovative ways to change the way that bank does business and to actually introduce competition for Fannie and Freddie's markets as well.  And Alex is a very creative public policy mind.  And he's been noodling over Social Security reform in recent months and has come up with a very interesting proposal, and we wanted to have Alex present his proposal and expose it to criticism. And we invited two people that are well known to all of you, Rudy Penner and Allan Meltzer, my colleague here at AEI as well, to discuss Alex's presentation.  Alex will go for about 30 minutes.  Allan and Rudy will have 15 or so to comment.  And then we'll have about half an hour for questions from the floor. So with that I will now hand it over to Alex. MR. POLLACK:  Thank you, Kevin, and distinguished colleagues, ladies and gentlemen.  It's a real pleasure to talk about this subject, which it seems that everybody, or at least a lot of people are talking about these days. President Bush has clearly had a success in putting the topic of Social Security reform on the agenda in a big way.  It seems to me that the fundamental goal with respect to personal accounts is a very good one.  And Jonathan [Weissman], who is here today, quoted me, and he quoted very accurately, that the fundamental idea of creating ownership for ordinary Americans in long-term savings programs is a great idea. Sometimes people call this Social Security set of discussions a debate.  It doesn't seem to me it's a debate.  Because a debate assumes that you know what the sides are.  It seems to me rather it's more like the marketplace of ideas where just as in a competitive economic marketplace you're looking for innovations for new and better ways to do things, and the point of the marketplace is to discover new possibilities and perhaps ignored angles of issues. I'm going to talk a little bit about philosophy and a lot about finance, finance being my trade.  On philosophy the notion of ownership or property is one deeply embedded in the American tradition.  It was linked by the Founding Fathers, which they drew from John Locke, their leading philosopher, the notion of linking liberty and property.  Life, liberty and property is what the first Continental Congress said, the Virginia Declaration of Rights, numerous state constitutions. Probably the greatest property-creating act in the history of the country was the Homestead Acts under the Lincoln administration.  We've had a long commitment to promoting home ownership.  And all of these can be thought of as linking the idea of property or ownership to a free society.  So I view the Social Security personal accounts as very much in the major flow of American political philosophy and thought in wanting to expand property or ownership to the majority so that ordinary people become not only home owners but owners of financial assets. So in short I think the fundamental idea is a great idea, and we ought to be experimenting with variations and permutations on the theme to see what we can get to work in an efficient way. That brings me to finance.  There are three parts of finance.  There's cash.  There are financial instruments.  And there is accounting. Cash is the reality.  I'm going to talk a good bit about the cash in the Social Security program. Financial instruments provide contract rights and risks and distribute them among the players. And accounting is an abstract representation of all this, and a good deal of financial analysis is involved with trying to untangle the complications of accounting in order to see through to the cash reality.  The bookkeeping often gets in the way.  Perhaps it does in this case of Social Security as well. We'll draw on the cash idea a little bit, because as I looked at the evolution of the personal accounts discussions, every proposal for personal accounts in some way or other which came forward started with the idea, well, first we have to divert some cash from Social Security taxes or so-called contributions--a nice 1930s euphemism.  First we have to divert some cash away from the Treasury, away from the receipts, by the government. And that runs up, in the first place, against the reality of how the cash in the Social Security program actually works.  As the just-published report of the trustees of Social Security says, all contributions are collected by the Internal Revenue Service and deposited in the general fund of the Treasury.  Most of us know that, that that's it, the money goes into the general fund of the Treasury where of course it's spent in one way or another. If you start with the idea of diverting the cash, of course the first thing that occurs to anybody is, well now the Treasury doesn't have the cash.  It has to make up the cash it needs in some way or other.  And the way it's going to do that is it's going to have to go sell bonds, convince some international investors or somebody to buy more.  Maybe that will pressure the bond markets, drive out spreads, maybe put more pressure on the dollar. The notion that you start by diverting cash, viewed from the individual point of view, then raises a set of issues. What are the individuals going to do when they suddenly have these accounts with cash in them?  Well, now you have to do something.  And many people think that for at least a great many American citizens, that would be something to be afraid of, an intimidating set of decisions.  Maybe you get fooled, maybe you'd make mistakes, or maybe you'd lose money even with the sorts of suitability requirements one might have. In a more hysterical mood some people have described this as forcing citizens to roll the dice or play the slots, as has been said, with their retirement money. Another thought that has been expressed is that if you have these personal accounts, that somehow diminishes the government's commitment to Social Security, that this should be a sacred social contract or an inviolable commitment, and this is somehow getting in the way of that, the personal accounts. Then on the operating side some have pointed out that with millions of accounts which will be very small, you're talking about things that are expensive to operate expressed as a percentage of funds employed.  It would have high operating costs, it's said.  Others have said if you can't control the cost you'll create a big windfall for Wall Street, which would certainly be bad.  And a lot of this has come together in a suggestion that the whole thing should be postponed, as one of the proposals that came from the Administration, until 2009, thinking about all these problems. So I started off saying, well, suppose that we don't assume you have to divert cash away from receipts by the U.S. Treasury.  Suppose we created a structure where Treasury's cash receipts, were unchanged, and in fact, Treasury's whole cash pattern was unchanged, could we then still create personal accounts?  We have at least one representative of the U.S.  Treasury here, so I'm sure he's glad to hear I'm trying to keep Treasury's hands on the cash. I'm not at the moment worried about the bookkeeping--if I could say it this way, the mere bookkeeping.  I'm worried about the cash patterns.  But suppose Treasury's cash position could be unchanged.  How could we do personal accounts? And in this way I ask you to consider the current way that what I call the mandatory savings part of Social Security works.  I'm going to talk in a minute about what in my view are the two different analytical components of the Social Security program.  And here I'm only talking about the mandatory savings component. It works like this.  Your money from the payroll taxes and your employer's matching contribution, which is effectively a tax on you as well, as the employee, all gets sent--as the Trustees so accurately said--not to some idea of Social Security but to the U.S. Treasury.  What does the Treasury do with the cash?  Of course the Treasury spends the cash on benefits, but also on anything else that it's spending cash on, on any program. It in exchange then sends bonds, and as many of us have been amused to know, these bonds are actually printed out on paper and kept by the so-called Social Security Trust Fund, and the Social Security Trust Fund holds these bonds' claim on the Treasury so that they actually are simply a Treasury liability.  They're part of the total national debt, although not held by the public.  But they're sort of indirectly held on behalf of the public, against off-balance sheet political formulas for future benefits which we're assured will be paid someday. Thinking about that it seemed to me that we could with great simplicity and great clarity, in a way that ordinary Americans could easily understand, create personal accounts by changing one element of that formula so that the mandatory savings function and I'll talk a little later about how much Social Security taxes this would represent but the mandatory savings function would work like this.  You send in the very same with your employer--12.4 percent.  Treasury gets all the cash it gets today.  Treasury does exactly as it does today, it spends the cash on whatever it's spending cash on.  Treasury issues bonds, as it does today.  But instead of issuing bonds to the Trust Fund, Treasury issues bonds to your account, your personal account. We have now created a personal account, not by putting cash in it, but by putting a financial instrument in it.  You remember the second part of my three parts of finance cash, financial instruments and accounting.  So your account now has in it a Treasury security.  The Trust Fund doesn't have it, you've got it.  You actually own it. When I told one of my old friends, a great expert in banking and financial history about this notion, he looked at me and said, you know this would work.  I'll tell you exactly what it's like.  It's like payroll deductions for savings bonds, the way they used to finance World War II.  And everybody could understand that, except it's a mandatory payroll deduction.  The government is taking your cash, and you're getting something that is a lot like a savings bond, and like a savings bond, it's going to last a long time, because it's long-term retirement savings. And it's my further recommendation that these bonds, which would be issued by the Treasury, would be pure accrual bonds, that is to say, like a normal savings bond, they wouldn't pay interest in cash so that you have the problem of reinvesting small amounts of cash in your account.  They would simply accrue interest and inflation indexation, which brings me to the next point. What bonds are these?  Well, there is actually a perfect Treasury bond for retirement savings.  It is the Treasury inflation index bond, or so-called TIPS, Treasury Inflation-Protected Security.  What is the biggest risk to retirement savings?  It's of course having your savings destroyed by inflation.  So here is an instrument which already exists, which automatically protects you against that risk. So we would have in these personal accounts on day one something which is a highly suitable retirement investment, a Treasury security that is zero credit risk, zero inflation risk, inflation indexed.  And that starts us off.  That allows us to start the transition.  But I do view this as a transitional idea, and it would moreover  do this in a way simple and easy to understand, and also at low cost.  These are in the book entry securities, Treasury securities, which can be run by computers while handling small accounts easily, and can be relatively cheap to deal with. Now in exchange you're getting an asset, you're getting something.  So what are you giving up?  Of course you're giving up the future off-balance-sheet liabilities of, in the first instance, and for most people, an economically equivalent amount.  You're moving from an ideology of hoping that the government will pay you in the future to actually owning a security. And I view this as a purely voluntary program, something that you don't have to do if you want to stay in the current program.  That's fine.  But if you like this idea better you can set up your personal account, and it will start accumulating in exchange for a portion of your Social Security taxes which represent long term mandatory savings, these TIPS.  It's up to you. My guess is, if you gave the American people this choice, that the vast majority would choose to own something as opposed to not own something, especially something so obviously appropriate, and something which doesn't present all the risk issues which at least some people would like us to be afraid of. So at the end of the structure, the Treasury has all the cash it had before.  The rest is bookkeeping.  Total national obligations haven't changed, but they have changed form because it is true that debt owned by the public has gone up.  Because you now own these bonds.  Debt owned by the Trust Fund has gone down.  And off-balance-sheet liabilities, which are nonetheless true liabilities, have also gone down. You don't have to market this Treasury debt.  Nobody has to convince the Chinese Exchange Fund or somebody to buy it.  It's automatically privately placed.  Individuals obviously have no difficult choices imposed on them.  If they do nothing they end up with something very appropriate.  And this, as another of my friends pointed out to me, that I tried this idea out on, he said, this is the G fund.  This is the same as the Federal employees' saving plan, where one of the most popular things chosen by the participants in that plan is the so-called G fund which is a fund that owns government securities.  So you can think about this as a G fund option for everybody.  Or if you like it better, you can think about it as payroll deductions for savings. There's obviously no pressure to so-called roll the dice or play the slots, because an inflation index Treasury is as exactly opposite to rolling the dice as you can imagine. And on the issue of whether Social Security promises should be inviolable contracts, can you think of a way to make your claim on the government more inviolable, and more a contract, in exchange for the money that you already sent in, than to make it into a bond.  That makes that claim as strong as possible.  It for starters will run on a completely book-entry Treasury system, and this allows us to get going now.  We wouldn't have to wait around. So what would you choose?  It's a voluntary system.  It's up to you.  And in the way of being voluntary, I also suggest that continuing to hold the TIPS should be voluntary.  That is to say, after a restricted period, which I think would be smarter, some number of years to be settled on a few or several.  For ownership to be meaningful these things should be negotiable.  So you don't have to keep on holding the TIPS.  If you want to have greater volatility for more return you can sell them.  These are government securities.  There will be a ready market.  And as a matter of fact there is an exceptionally strong bid for TIPS at the moment.  And then you can reallocate the assets in your account if you want to into some maybe keep some TIPS, some private bonds, some equities, or whatever is on the approved suitability list. But it's also voluntary in terms of holding this.  But for those who would be intimidated or worried about making mistakes, you have the so-called default case, which is, if you do nothing, if you make no decision and do nothing, you own a zero-credit-risk inflation-adjusted prime very suitable long-term retirement savings vehicle. So in that way I view this as a transitional pattern, which allows us to get started now in a very straightforward way, with a very robust default case that could evolve further in the future. Now, let's think about the Trust Fund for a minute.  What happens to the Trust Fund?  When I discussed this with another colleague, he said, well you could call this cutting out the middle man.  The thing about the Trust Fund is, it's actually a thoroughly unnecessary middle man between the two real principals who are involved in this whole set of structures called Social Security. The two real principals are you and the United States Treasury Department the citizen and the Treasury Department.  They are the only real principals.  The Trust Fund is just a bookkeeping middle man.  And moving to this notion of accumulating Treasury securities in the personal accounts for mandatory savings cuts out that middle man, actually makes the relationship between the government and the citizen much clearer, and, I think it's fair to say, much more honest, than it is today, in which you have this mystification, this complexification, the so-called Trust Fund, in between the two real principals. All right, how much of Social Security taxes should this personal accounts with TIPS structure have, if you like the idea so far?  I've had two approaches to this.  One is based on financial projections, again, by the Social  Security Trustees.  If you take their intermediate projections over the next 10 years of the additions to the bonds in the Social Security Trust Fund compared to the Social Security taxes, only the old age and survivors insurance, not disability I'll touch on that again in a second but how much each year is that addition in bonds. And the answer is, over a decade, it averages about 34 percent.  So about 34 percent in there, in the trustees' own intermediate projection, is a build up of Treasury bonds in the Trust Fund.  Well, what's 34 percent of your Social Security taxes?  Well, it's around 4 percent of your income.  That 4 percent number may seem familiar.  You could take more or less 4 percent of wages, put them into this personal accounts with TIPS plan, and you would be--at least if you believe the intermediate projection--basically shifting the Treasury bonds out of the Trust Fund into the personal accounts, and  the Trust Fund would have the same number of bonds it has today, which is about  $1.5 trillion. Now if you made the amount bigger that you were working the personal accounts with TIPS, then you would start liquidating the Trust Fund, and we'll talk in a second whether we care if the Trust Fund, this so-called Trust Fund, is liquidated. A different approach, depending on how much of Social Security should be devoted to such a personal account plan, is an analytical idea.  I said before I think of Social Security as having two components.  One component is a safety net, or insurance, or a welfare program in part, an element.  And the other part is mandatory savings. The first part, the safety net, insurance by definition, you have to commingle funds or no insurance scheme can work, no welfare scheme can work.  You have to leave that part of it alone functioning just like it does today. How much of Social Security is that?  Well, the chief actuary of the Social Security Administration estimated that the disability and survivors' part of Social Security expenses is about a third.  So how much is mandatory savings?  Well, maybe it's two-thirds, or maybe it's just a half or so, of total Social Security taxes. What the government is just saying to you, you must pay these taxes.  We're going to make you save for retirement and old age. So it seems to me in the ideal case you would figure out this functional split, how much is insurance, safety net, welfare, how much is mandatory savings.  And that which is mandatory savings ought to move, ought to have a personal account option.  I'll say again, it's up to you.  But you ought to have the chance to have personal accounts created in this fashion I'm suggesting, so a half or so. Now let me talk about the liquidation of the Trust Fund.  And I propose three points here.  If you think that the bonds in the so-called Trust  Fund are meaningful, think how much more meaningful they would be in your personal account when you actually owned them. If you think that the bonds in the Trust Fund are not meaningful, the Trust Fund doesn't really mean anything, then you shouldn't mind their disappearance. And finally, if you think, as some people do, the only real meaning of the Trust Fund is a legal ability to pay benefits under the law, and if you don't have this bookkeeping entity then you can't pay benefits--just remember, whatever we do, we're talking about changing the law, so we'll change that in the law as well. A brief word about retirement age.  Jeremy [Seigle] gave an interesting presentation here a little while ago, in which he pointed out that in 1950 the median difference between or the difference between average expected life and average retirement age was 1.6 years.  Average retirement age was about 68, in 1950, according to his numbers.  Today, the difference because average retirement age has gone down, and average life expectancy, as we all know, has gone up is 14.4 years.  So if you think about the fundamental financing problem, financing the period between retirement and death, that just got to be roughly ten times as long as it was half a century ago. So again, on my voluntary theme, I think that whatever we do in Social Security, and I think personal accounts will work in this way, we ought to create incentives for people to be willing to work longer if they can.  I'm not for mandatory changes in retirement ages, which would be, in many individual cases, inappropriate or unfair.  But if you have the ability to continue to accumulate assets through your long-term savings programs, if you continue to work as long as you could, and wanted to, that seems to me again a very attractive voluntary idea. So how would this all come out if we pursue this idea in the way of results?  It seems to me, the results would be what we want philosophically, which is greater ownership of assets, widely spread in American households over all economic status.  In the default case or in the first instance, risk-free assets, it would take away the whole risk argument and the fear of risk.  Obviously, paid ownership would create an ability for inheritance, much clearer links between what one's own efforts are in retirement savings, so that the fruits of your own labor are much more clearly represented in your owned assets, and complete clarity or honesty in the dealings between the government and the citizens or the Treasury Department.  And we could do it right away. So a final thought.  What would ordinary Americans choose?  What we're saying is, it's going to be voluntary.  So would you choose to have bonds build up in an arguably meaningless Trust Fund with benefits off balance sheet subject to future political deals, hoping that you're going to get your Social Security benefit?  Or would ordinary Americans prefer to accumulate assets they really own where they could get a quarterly statement and look at it, plan for the future, be able to estimate very accurately its real or inflation-adjusted buildup in the future, and over time choose between the complete safety of TIPS or a more diversified portfolio? My guess is the vast majority would opt for the personal accounts on this scheme.  And in any case it seems to me we ought to have a chance to make such a choice. Thank you. MR. HASSETT:  Thanks very much. I guess we will go according to the agenda.  And our first discussant will be Allan Meltzer. MR. MELTZER:  Thank you. I welcome the opportunity to comment on Alex Pollock's paper, and on the general view of Social Security reform.  To deal with Alex's paper first, I think that he has a great proposal.  It's simple, it's understandable, it's effective. My main question is, why not make it all private accounts?  Why do we need the government as an intermediary in the savings system?  We can make it mandatory, and then let everybody have indexed bonds, or some other asset. Let me start with some basics.  One of the comments that one reads all the time is that the proposals for Social Security reform is not going anywhere, and so on.  I think if you think back only as far as the 2004 Kerry campaign, you see that we've come a long way.  Because in the Kerry campaign, the Democrat position was, we don't need to do anything. There are still people who say that, but they are getting to be fewer in number, and most of the Congressmen that I hear where I live at least are now talking about the president's plan is no good, but that we really need to do something.  And the Senate voted something like 100 to nothing that something should be done, that this was a problem. But they weren't saying that a little while ago, so we made the first step.  We've gotten people, at least some of them, aware that there is a problem with Social Security, and that's a real triumph, because we've only been at it for about 30 years. I said, half seriously, half jokingly, why not make the whole Social Security account private.  After all, what does the government add?  The government cannot do anything that has to do with the maintenance of Social Security.  All it can do is redistribute the costs, perhaps run the system a little bit less expensively than other people can do.  But it's mostly concerned with redistribution.  And Alex's proposal doesn't deal with that issue. I believe that the hidden agenda, for those people who oppose the president's private accounts, is that they don't want to let go of the money, because they want to have something to say about how the money is going to be redistributed.  And I think that they believe incorrectly as it turns out that there is more redistribution in the Social Security system than there is, because it turns out that the poor people don't live as long on average, and consequently they don't receive benefits for as long.  So on a present value basis there isn't as much redistribution as one might think from the beginning.  But I don't believe that that is a widely known fact and it is a fact a widely known fact among the politicians who are making these arguments. The AARP is the voice of the monopolists who want to keep this problem bottled up in the administration. Now, what are some of the problems?  I'm going to come back to Alex's proposal.  What are some of the problems?  One of the problems I think that the president has in selling Social Security, private Social Security accounts is that I suspect that a great many of the public believes that they actually have an account, that is, they believe that they put in their money, and that it's there, and sort of like children who put their money in the bank, they think the bank is holding that money.  When they want to get it out, it's there to be taken out. And if you go around and ask them, I think you'll find that a great many of them think the government actually has an account with their name on it, which is true, and with their money in it, so when they want to draw on it, it's there to be drawn.  So one of the big educational jobs is to convince people that this really is an intergenerational saving plan in which the current generation of retirees is paid for by the current generation of workers. And as the demographics show, there are two things that have happened to that scheme all over the world.  One is that the number of workers has declined relative to the number of retirees, and that goes along with the fact that Alex cited about the increased life expectancy, and the small changes in the retirement age. I would like to also comment on a proposal which I think deserves more attention, and that is, whether we should index the Social Security system for prices or wages.  And there is now a mixed proposal which when you think about it is certainly wrong.  That is, we're going to index to prices for high income individuals, and we're going to index for wages for low income individuals.  I mean you can just do a little bit of computation, the fact that productivity growth is going to raise wages relative to prices over a long period of time, and you've got to see that the wage line at some point is going to pass the price line, and we're going to be paying more and more and more to the wage earners.  So that can't be a sustainable long-term solution to the problem, as desirable as it may be for people who think that there needs to be more income redistribution. But there is another problem, and it's a basic problem.  And it's a basic problem which reflects how little understanding there is about what the nature of these long-term problems are.  If we index to prices, what we're saying is, like Alex's index bonds, what we're saying is, well, we index to prices, then we're going to make sure that inflation does not change the real value of what it is we're going to save. If we index to wages, we say, well, the future generation of retirees who may live for 20-30 years are going to benefit from the productivity growth which they did not produce.  They are going to get the productivity growth that the current generation of workers produces. Now that seems like an odd idea when you start to think about it, because where is the money going to come from to pay the productivity increase to people who didn't produce it?  After all, the idea, the economic idea, is very simple.  You get paid according to your productivity.  That is, you have to earn in one way or another the amount of money that somebody pays you.  And if a company tries to pay you more than you earn, they're not going to have much return on their capital, and will therefore go out of business. Now where does the government get the money to pay the productivity increase to this growing mass of people who have stopped working and therefore don't earn the productivity increase?  And the answer is, they don't.  So that's an unsustainable program, because it's indexing for I mean it has the wonderful political appeal of saying to people, look, no matter how long you live, we're going to try to keep your standard of living sort of equivalent to the standard of living of the people who are now working. That's fine as a political statement, but we then have to ask, where does the money come from?  And the answer is, it doesn't.  That is, there has to be a tax on the people one way or another on the people who are now working to shift some of their benefits to the people who are now retired. One of the most remarkable parts of this discussion has been the reaction to the president's comment that this Social Security redistribution sorry, intergenerational transfer system was in crisis.  And of course, as soon as he said that, many people got up and said, crisis?  There's no crisis.  It's only $70 trillion that we owe that we have to collect.  I mean just $70 trillion.  Why should we be concerned about that?  That's not a crisis. I don't know what a crisis would be.  But $70 trillion dollars still seems like a lot.  And unfortunately, having said that, the president's program only deals with the smaller part of that.  The big part of that is the Medicare, and the way in which Congress thinks about this serious problem or crisis is to say, well, we're going to increase the amount of future liabilities by passing the drug bill, and the only thing about the drug bill was, it wasn't big enough.  That is, we didn't make the future deficit larger. So those who despair that we are going to solve this problem before it really does become a crisis at hand, as opposed to a crisis in the future, they have to think about the politics of the  Congress, and their willingness to deal with the  $70 trillion expected deficit, give or take $10 trillion, not a big matter in this estimate, without making it worse. Now what I like about Alex's proposal is that on the part of it that he deals with, which is an important part, and that is, the issue of private accounts, it's simple, it's straightforward, it just says, let's get rid of the Trust Fund and put the same bonds into individuals' accounts, period.  Then we can talk about what kind of bonds they're going to be, and how long you have to keep them there before they can exchange them for something else, and so on.  But those are all details. The basic idea of establishing a private account is very simple, direct and I think quite a brilliant proposal which says, let's just get rid of the Trust Fund, which is a meaningless piece of baggage, and put these bonds into individuals' accounts. That would have some other benefits.  I mean it would--for example, the property rights would be more secure.  You could inherit them, or you could pass them on as an inheritance to your children.  They'd be yours.  And as a result, they would be part of saving, and private saving, and that would be perhaps a good thing too. One of the things which has not received enough attention is that this is a voluntary program, and many of the criticisms of the private accounts neglect the fact that the individuals who elect them take risks and all that, and the risks certainly get a lot of attention.  What gets much less attention, or no attention at all certainly from the AARP is that nobody has to take these that doesn't want them, and that's true of Alex's proposal.  Nobody has to take the TIPS.  They can stay with the present system.  And nobody has to get rid of the TIPS and take, at the end of five years, take the advantage of the opportunity invest the money themselves, and perhaps leave a bigger benefit to their children or grandchildren. So they get these TIPS.  Now the TIPS don't pay very much.  They pay--currently long-term TIPS pay less than 2 percent.  So in TIPS generally, with a brief exception perhaps at the end of the '90s, generally, are not going to pay presumably much more than 2 percent, 2-1/2 percent.  So those are safe returns, and like all safe returns, they don't pay a high return. Now they pay a higher return than what people are likely to get in the Social Security account, if you just look at what the actuarial estimates are.  So that's a reason that Alex doesn't emphasize, but which I'm sure he's aware of, that would get people to want to take the TIPS, that is, 2 percent is more than what they're going to get if they just hold on to their Social Security account as it currently is structured. But many of them will want to take riskier assets, one would hope, and that would be good for growth and capital, because it would drive down returns on those assets, and therefore, encourage more capital building, which would add to the income and help to pay some of the costs which the government has incurred. So on those questions or issues, I think what Alex has done is really very good.  What I think he recognizes, but doesn't discuss, is that many of the arguments in my judgment, at least, that are made against the president's private accounts are a subterfuge.  That is, people there are not worried about the deficit so much.  They sure don't seem to worry very much about the deficit when they go to vote expenditures.  What they worry about is control.  That is, how can they keep their hands on the funding so that they get to decide who pays and who receives?  That's what government is mostly about. Now, as to risk, of course there is a bit of risk that people have even with the TIPS.  I mean those prices, or interest rates, fluctuate up and down, so you may get a period like 2001 when the rates are down when you retire at that particular point, so your account may reflect that.  But by and large, what he says is correct, that the rate of fluctuations for these assets is not going to be  great, and so they are going to be not very risky. So let me conclude by saying I think this is a great proposal.  I think the critics, for the most part, do not want this kind of reform.  And so when Alex's argument becomes popular, as I hope it will, they'll come up with new arguments against private accounts, because they really haven't been direct or honest with us about why they really object. It's interesting to close on this note.  We now have examples.  This is the land of the free and the home of the brave, sort of market capitalists par excellence.  The Russians have a private system.  The Poles have a private system.  The Chileans Chilenos have a private system.  You know, there are lots of private systems around the world.  None of them seem to be doing the things that are so feared by the Members of Congress and the AARP who are opposing this scheme. And so a critical question to ask, and I wish that some of the journalists would begin to ask them, is:  Why is it that private voluntary accounts of this kind, of the kind that Alex is describing-- simple, direct, and understandable to everyone--why is it that they're good enough for the old commissars, and they're great for the Members of Congress, but they're not good enough for the American public. MR. HASSETT:  Thanks a lot, Allan.  Let me now turn it over to Rudy. MR. PENNER:  Thanks a lot, Kevin. I think Alex has raised some very interesting questions about how personal accounts should be structured.  But before getting into them, I'd like to be terribly wonkish and talk about some of the accounting and political issues raised by his proposal, because I do think they're important to the politics and to the economics of the proposal, and I don't think that Alex's approach has the advantage over, say, the president's approach that he would claim. First, let's look at how the Pollock approach would affect the Federal unified budget deficit.  In his proposal payroll tax revenues remain exactly the same, so obviously that doesn't affect the deficit. He writes down the assets in the Trust Fund, but that money changing hands doesn't affect the unified deficit.  But he does distribute risk to the public, so the publicly held debt goes up quite a bit, and that obviously has to be reflected by an increase in the unified budget deficit. So I think deficit hawks--and I think more than Allan implies you can find them on the Republican side of the aisle, too--they would have a very similar reaction to the Pollock proposal as they do to the Bush proposal about the very large initial increase in the Federal deficit. Like most plans of this type, the plan compensates for the immediate increase in the explicit government debt by promising to reduce the promised Social Security benefits in the future.  And advocates of this general approach argue that all you're doing here is issuing some very explicit legal debt to retire the implicit debt implied by the Social Security promises. Now skeptics like me worry about the politicians of the future being presumably no braver than the politicians of today might not actually carry out those benefit cuts in the future.  Now I do admit on the other side of the argument that they have so far pretty much stuck with the 1983 reforms in Social Security, though buried in the Senate budget resolution is another attack on benefit cuts made in the past, or at least the increased taxation of Social Security. So I think there is always going to be some worry about whether having gotten the ice cream of subsidized individual accounts, the politicians will swallow the vegetables of actual benefit cuts or tax increases. I would prefer a much safer course, to me, in which more of the costs of individual accounts was paid for up front. Obviously, the Pollock approach does nothing to win political friends on the left, although the amount of assets held by the Trust Fund is a bookkeeping entry, a kind of accident of history, and it's far from sufficient to pay promised benefits.  They do represent claims on resources that are legally dedicated to the Social Security system, and if not as many of those assets accumulate as expected by the system's trustees, the whole thing will go bust before the 2041 go-broke date that we now have. Now as Alex emphasizes, this is a political and legal issue.  This has little economic importance, because the real ability for the Treasury to pay benefits in the future depends on the overall taxing and borrowing power of the United States, presuming it still has any by the 2040s, and not on a bookkeeping balance in a trust fund. However, the legal and political issues are crucially important to the liberal defenders of the traditional Social Security system, because the assets of the Trust Fund represent a political, and perhaps a moral, commitment to the system.  Or put it another way, the system has a claim on the Trust Fund assets, and therefore, defenders of the traditional system vigorously oppose plans like those of the president's now that would reduce those resources. And because Democratic votes are essential to the passage of Social  Security reform in the Senate, reason would suggest a compromise in which individual accounts were not entirely financed with Trust Fund resources, but some sort of add-on or tax increase was used to cover some of the costs. Unfortunately, reason is not much in evidence in this debate, and Democrats seem determined not to compromise, so all of that may be quite irrelevant. But turning to the more interesting conceptual issues raised by Alex's approach, I think the key question here involves how much risk-taking you think is appropriate for the individual account.  Now granted Alex is only paternalistic in this regard initially by restricting the investment to very low risk TIPS. When you look at the individual accounts that have been created around the world, their response to risk taking is very often to offer some sort of partial guarantee by the government, or some sort of generous floor pension.  But this is a key question in terms of the design of individual account proposals. And in this regard, there are things that I like and things that I don't like about the president's particular approach to the issue.  Now the president's proposal limits risk to a very considerable degree by allowing investments only in broad-based bond and stock index funds of one kind or another.  And he also has a default investment, a so-called lifecycle fund which would reduce risk taking as a person approaches retirement. And the other good thing about his approach is that it would greatly lower administrative costs compared to approaches you see around the world, particularly with the Chilean system for example where administrative costs have been a real problem. The main guarantee on the president's system stems from the fact that a very large traditional Social Security system would still remain, and that provides something of a floor.  But the president hasn't specified his design plans for the traditional system in any detail yet. The thing I don't like about the president's system is that one of the ways he reduces benefits depends on one's lifetime contributions to the individual account.  Not what one earns on the individual accounts, but rather, on the contribution.  Essentially the presidents' plan regards the diversion of payroll taxes as a loan to the individual.  And the person is expected to pay back the loan at the time of retirement at a 3 percent real rate of interest.  That's a pretty hefty rate of interest, and very probably above the rate of return that one would earn on purely riskless assets. So that in a sense would pressure people to at least take some risks in their individual accounts.  The I mean you couldn't work it, if you think today's real rate of return on TIPS is reflective of what it will be in the very long run, Alex's plan just wouldn't work with the president's proposal, because everybody would be a loser. I think the president's proposal would be improved somewhat, although I admit it wouldn't make a huge difference, but if you independently specified the benefit cuts in the long run, that would pay for it, I think that would be a clearer result for the individual to figure out.  I think you could design it so that the uncertainty wouldn't be quite as great, but there would still be uncertainty relative to the current system. But returning the main questions here, do you want these individual accounts to contain any risk?  And I guess it would be my take to allow the system to exploit the risk premium in the kind of careful way that the president lays out, that is to say, in a very few broad-based investments. I would not, however, provide any guarantee to the rate of return, as is done in some countries, beyond propping up our safety net somewhat for the very poor, by making our SSI program more effective. Many proposals you see out there today try to make the traditional Social Security system more progressive.  Allan talked about that some.  There is some question whether today's system is progressive at all, and people argue about that.  But the very fact that they argue suggests it's not very progressive.  And I think because of the way the traditional system is structured, it's very difficult to make it more progressive. And that's basically partly because of past history.  FDR very firmly believed the political theory that you could not maintain political support for a system that gave nothing to the middle class and the fairly well-to-do, because their support was needed to stabilize a system for providing benefits to the very poor. I don't know if that theory is right or wrong, but it's left us with a system that is very hard to change distributionally.  When we talk about fairness in the tax code, we talk generally about the family as the tax-paying unit.  We talk about either total income or total consumption as a tax base.  Social Security doesn't work that way.  Social Security is based on individual wage earnings, not on total income.  It has some family elements in the spouse's benefit and survivors' benefit, but basically it's very much individual oriented rather than family oriented. Going back to the risk issue, I think it would be terribly foolish to argue that the traditional system is free from risk.  Most important, benefit changes are inevitable in the future, and the longer we wait the bigger they're going to be.  So that's a very large element of risk. But even if you maintain the current system, and abstract from all of that, a person's Social Security replacement rate depends on a host of random variables.  Your exact income profile over your lifetime, when you earned the wages you earned, whether your spouse has a career or doesn't' have a career, variations in the national average rate of wage increase just before initial benefits are calculated at age 60, and on and on and on. There is a huge, quite a large possible variance for replacement rates if you think of a 20-year-old starting out in the labor force.  So given that people are willing to take that risk and live with it, I guess I don't think it's inappropriate for the individual accounts to contain quite a bit of risk as well. MR. HASSETT:  Thanks a lot, Rudy. Just a point of clarification.  It seems that the difference between Alex's plan and the president doesn't have a plan yet, but he's got one, a proposal amongst others that people think is more likely to form the basis of a plan.  But the difference between Alex's plan and this proposal is just really when you start putting your money into the account.  Under the president's plan, then, you get to do what you want right away.  And if you decide that you're going to, say, put your money in the S&P 500, then the government presumably has to take a Treasury to the marketplace, because that money that you're putting in the S&P 500 they don't have available to pay benefits any more, so then they have to take their tin cup to the Chinese, as Alex put it. Under Alex's plan, for five years or something, instead, the government just puts the Treasury in your account, and then five years from now you can put it in the S&P 500.  So it's kind of a small difference, really. So first I want to ask you, Rudy, is your preference for the president's plan a minor preference?  Or do you think that what looks like a small difference to me is actually a bigger difference? MR. PENNER:  No,  I think it's very little difference.  Very very little difference macroeconomically.  And I think Alex emphasizes the cash position of the Treasury much too much, because what's really important here, national savings flows and so forth. But I think a major difference really is in the attitude toward risk.  Now, Alex hasn't told us how soon you can sell these TIPS, but that's absolutely crucial here.  If you can sell them and buy exactly the same assets as the president is offering, I would suggest there is no difference at all. MR. HASSETT:  So then I have a follow-up question for Allan, which is, suppose this debt that we have to issue is enough so that there is an interest rate effect.  Just presume that that is true.  Then does it matter if we go with our tin cup to the Chinese, or if we just stick it in people's accounts? MR. MELTZER:  An increase in interest rates would matter. MR. HASSETT:  Would you have a smaller interest effect if you just put it in people's accounts? MR. MELTZER:  Yes, if you created a debt and an asset at the same time, you're not doing an awful lot.  I mean that's what Alex's plan does, you create a market for the debt.  And as you and Rudy just pointed out, at some point you're going to wash away from that, you're going to get away from that, and you're going to allow individuals to force the government to sell the bonds, or to sell some of the bonds, so that you can invest in capital. Is that bad?  You take on more risk, but society gets a lower cost of capital, and that's I would think a valuable thing for the society to want.  It's not an unmixed blessing, but it's certainly a blessing. MR. HASSETT:  So then the way to think about the macroeconomic effect of doing it Alex's way would be say yes or no after this, or add would be that there are all these people that aren't buying Treasuries, and if we give them Treasuries you're creating demand, and so therefore the supply and demand effects on the bond market are muted? MR. MELTZER:  Yes.  Yes. MR. HASSETT:  Okay.  So that was my humble attempt to clarify what was going on a little bit.  And I will now turn it over to the audience for questions.  Please raise your hand and state your name and affiliation before the question, and make your statement in the form of a question as well. MR. KLUNTER:  Jim [Kluntner], Senate Budget Committee.  In these debates and discussions about private accounts I often have trouble squaring what I hear with what I learned in economics graduate school.  So I'd like to go back to a very basic question for any member of the panel, which is, do any of you believe that the United States as a whole, not any individual, but the United States as a whole, can create new real wealth, that is demand over new real goods and services, solely through financial manipulation? MR.         :  Well, the answer, if it's solely by financial manipulations, of course, you can only move the paper around.  But you can certainly create the circumstances where entrepreneurs, exactly as Allan said, if you create markets for financial assets then entrepreneurs move into taking advantage of that financing, and it's the entrepreneurial activity that creates the wealth.  But you can facilitate it through what you do financially. MR.          :  I think what you're really asking is, can individual accounts create real savings.  And that's an absolutely key issue in this debate.  I think there are two reasons for having individual accounts, but they conflict.  One is purely political.  I think Charlie Stenholm has it right when he says individual accounts are the ice cream you get for eating your vegetables of lower benefits and perhaps higher taxes. The trouble is, to really sweeten the ice cream, you've got to subsidize the individual accounts, perhaps by providing some sort of tax relief.  So that increases the Federal deficit, and it offsets whatever increase in saving you get from the individual account.  And that's a real conflict.  I don't know how we work our way through that politically. Now all these plans in the longer run promise a lot of saving by ultimately reducing the benefits in the traditional Social Security system.  And while I worry about them actually going through with that, that is where the real savings would come. Ironically, as I see the whole budget problem, the combination of Social Security, Medicare and Medicaid create one heck of a problem in the, I would say, late 2020s or 2030.  Essentially most of these plans have no beneficial effect on the deficit.  And that worries me a great deal.  I find it a very frustrating part of the debate.  But I see a financial collapse occurring sometime in the 2030s long before Social Security goes broke, and all of this debate has very little to do with that. MR.          :  It clearly depends on whether you can change relative prices through one of these devices.  That is, can you change the cost of equity capital relative to the cost of debt.  And  to answer that question is not easy.  Let me just throw back a question to you. If you take away the Social Security funding, would you affect the government's spending rate, that is, if they didn't have these sources to cover parts of the deficit, would they spend less? If the answer to that is yes, then we clearly can get a better allocation of resources out of the system than we get. Or ask yourself the following question: Suppose that when we started the Social Security system, we had started Alex's proposal.  That is, we had started with a system in which individuals had their accounts, and they had them saved.  And they now could allocate them to more capital.  Do you not think that we would have a larger capital stock at this point?  I do, because I think the relative prices would have changed. MR. HASSETT:  If you want to answer, feel free.  There's a microphone an inch away. MR.          : I don't believe that financial manipulations by the government can create new wealth, can conjure new wealth out of thin air. MR.          :  You bias the question because you call it a financial manipulation.  But real things may be changing as in the two examples that I gave you. MR.          :  Or just to put it another way, the share of payroll that is paid out in benefits, which is right around 11 percent today, goes up to around 19 percent.  And if we change things so that the budget balances, in order to maintain that benefit, then that will certainly have real effects.  And so if instead of having the tax increase, you do something else that is politically feasible, and you don't have it, then that should have real effects too, right. MR.          :  [off-mike]  What Allan is saying, basically, is if you could turn back the clock and not have the legacy debt, then sure, you'd be in a better situation. MR.          :  But that's not relevant to the point I was making, right?  Okay, with Mr. [Kitchen]. MR.          :  But it is relevant to the point that you were making about financial manipulation.  Because it says, if you change the mix you would have a different outcome, and if you change the mix not then but now, you're going to get different outcomes, so it's not just financial manipulation. MR. KITCHEN:  Hi, John Kitchen.  I have a question.  I kind of agreed with Kevin's view on the notion that there is very little difference here in the notion of your proposal relative to the current view of the personal accounts.  But one difference is the sense of a default allocation where under your proposal the individual accounts, personal accounts, would have investments solely in government securities. And so I guess my question really is, how important is the notion of a default allocation that individuals would have in their individual accounts?  If it's a lifecycle, one option is a lifecycle account, and the default would have different shares across different types of investments.  How important is this default allocation as to how individuals behave and how that would affect the outcomes both for the accounts and for the economy as a whole? MR.          :  Let me go first.  I mean John probably knows this, but there is a big literature on what happens when you give people default allocations.  Do they change it?  Most people don't change it.  I think the paternalistic view that Social Security is there to protect people who don't want to or are unable to make sound decisions suggests that one way to protect them would be to have the most risk averse possible default allocation.  And that is presumably what Alex is intending. But I would guess that if Alex's proposal became law that something like half of people would keep the default allocation, given the literature on this. MR.          :  I think experience in Sweden, which may not be quite transferable, suggests the default is very important.  But there they made the mistake, I think, of giving the individual account investors a choice between I think hundreds and hundreds of mutual funds.  But they also created a default option, and it's my understanding that most people are taking the default, partly because the default is done pretty well. MR. POLLACK:  If I could just add to that, in my view the default option is very important in any system of choices.  I think Kevin's comment is exactly right, most people take it.  A big advantage of the default option is it takes away a big pressure point of reinvesting at a particular point when you're trying to start off.  You could introduce this type of plan at the top of the market, which I believe is what happened in Sweden actually.  And a lot of people lost money on their accounts.  They did this right at the top. It seems to me a big advantage to have a default option in a way that is extremely suitable, but also very low risk, so nobody is pressured, but also, you have time to decide. There is another issue which has to do with what happens when you get to the retirement date.  I discuss this in my paper.  I did not mention it in my comments.  But there is a problem in my view if you say, well, when you get to retirement date, you now have to buy an annuity.  First of all it takes away a lot of freedom to say that.  But secondly, you have at that point then a tremendous reinvestment risk on what is the annuity market, which is nothing but the bond market in a different form. What does the annuity market look like at a particular point in time when you happen to become 65 or 67 or what not?  So what I have proposed is that these TIPS which will be created will be very long-term TIPS geared to retirement date, but not maturing at retirement date, but they would be layered over let's say 15-20 years, so that in the normal maturation of the TIPS you would have something that functionally looks a lot like an annuity, but the idea is to take away the reinvestment risk at a particular point in time. And finally, if I could say so with our colleague from the finance committee, it's very hard for the government to create things, but one thing the government can absolutely create is Treasury securities.  So we have a plan that we know, if you like this idea of getting into gear right away, we know we can create the wherewithal to make this happen. MR. HASSETT:  Allan wanted to add one more thing. MR. MELTZER:  I just wanted to add one thing.  We dismissed the difference between Alex's plan and the president's plan, sort of saying, well, it doesn't really make much difference.  Are the people who say that willing to take the next step and say,  there's a Democratic response to the president's plan, many of the features of which he eliminates, that those responses are de minimus, bogus?  That isn't what I read in what the journalists are writing about these things.  They are treating those things about the deficit and the private accounts as if they were really serious matters that require great amounts of soul searching and so on. Don't regard them as de minimus.  I mean what's good about Alex's plan is, it's simpler, it's easier to explain, and it accomplishes the same objective.  In that sense it's the same.  But it also gets rid of some of the main criticisms that have been made against the president's plan, so it can't be exactly the same. [A short gap in the recording may be an off-mike question] MR.          :  Correct. MR. MELTZER:  All it can do by issuing government debt is postpone the problem.  At some point those obligations--that's what we're learning with this exercise that President Bush started, we're learning that some day those obligations come due.  And in the end, there either has to be a cut in benefits of one kind or another, or an increase in tax rates or some combination of the two. MR. HASSETT:  We've got another question right here, and then after that, we'll go back to Steve. MIKE WINE:  Mike Wine with [BNA].  This question is for Mr. Pollock and then Mr. Penner if he cares to respond and Mr. Meltzer.  But do you feel like your proposal may get lost in the shuffle so to speak, in that obviously it uses the term "personal accounts" means those against personal accounts will immediately dismiss it.  And even those for personal accounts, but on the president's proposal, may dismiss it because it's contrary to what they're proposing?  Therefore, what remains is few in number to sign up for your proposal. MR. POLLACK:  I'll give you the notion that I began with, which is what we should be having, if I can use this word, is a dialectic as opposed to a debate, where we're exploring possibilities and various combinations of ideas while attempting to discover the right answer. I think personal accounts should be part of the right answer if we can decide the rest of it.  As to the risk of being overlooked, I can only quote for you what Samuel Johnson wrote in about 1752, which is still true today.  He said, among the mistakes of young minds is an overestimation of their own importance, but as time brings them forward in to the world, they find they share praise or censure with innumerable others, and are lost in the obscurity of the crowd. [Laughter] MR.          :  I don't think there is much to say about it.  I mean I think it's good to have this quite incredible debate we're having, mainly on the Republican side of the aisle, with all sorts of new ideas being thrown out there.  And the real challenge is to find the one that can get 60 votes in the Senate right now.  That's basically the point, I think. MR. HASSETT:  Steve? MR. ENTON:  Steve Enton.  As a former Treasury employee, I suggest that whether we have to borrow $8 billion a week or $6 billion a week, the Treasury could handle it pretty well, so that's not a concern I have. I have a little bit of curiosity as to how some of these features would affect the total outlays on Social Security slash the rest of the problem over time and how soon we have to worry about the government cutting some benefits or other spending to cope with it. If one can inherit the funds, and they don't revert to the Treasury in effect to pay the people who are living longer, and we want to preserve the benefits of people who are living longer at some basic level, would not the inheritability mean somehow a bigger cost to the system later on? I'm all in favor of inheritability, but I think we have to face up to that cost, that's one point. The second point is, as the trust funds accumulate more or excuse me, are replaced more and more by TIPS that are allocated to people's personal accounts--it seems to me the rest of the Trust Fund is growing more slowly.  Within a very few years the Trust Fund surplus is going to peak, and then be zero at 2017.  You would hasten the date I believe at which there would be nothing the Treasury had there to redeem, and so its authority to pay benefits would come to an end sooner rather than later, forcing Congress to address this issue sooner rather than later, which is possibly a good thing.  But I'm not sure the Members will appreciate it. Another question involves the rate of return.  I think the TIPS are bearing nearer 2 than 3, which is terribly low, and people would be better off getting a higher return, particularly if you are low income and need to try to be comfortable on this program.  You need to take the chance. But having said that, it's still a higher return than middle income singles and upper income people in general will get out of Social Security.  So if you make this an explicit bond that they actually have, aren't you promising in a sense more than the current system is promising?  And isn't it going to get bigger in the aggregate rather than smaller?  And I'm nervous about that. Thank you. MR. POLLACK:  That wasn't directed to me.  I guess it was.  Thank you asking that set of really excellent questions which highlight some important factors.  If I forget one trying to go through them in order, maybe you'll remind me. In terms of the inheritability, what we have to do is make a calculation for the average case, leave aside the possibility of making this tradeoff progressive, which I discuss in the paper, but leave that aside, is making the economic value of the asset received versus the benefits given up equal.  That in an individual case is impossible to do, because you don't know what your longevity is.  But in the average statistical case you can do it, assuming your life tables are good. So I think the first issue is answered by the difference between thinking at an individual level versus thinking in terms of statistical aggregates the way an annuity writer has to think. What was your second one?  The Trust Fund? MR.          :   The Trust Fund is going to come a cropper sooner. MR. POLLACK:  Yes, well, as I suggested, I think the sooner we get rid of the idea of the Trust Fund, the better.  I don't see Rudy used a couple of times the word "subsidized" with respect to these personal accounts.  I don't see any subsidy element here.  Next I know is the real rate which I want to get to.  But I think the sooner we get rid of the fiction of the Trust Fund, the better. And when people talk about going bust, what they really mean by that is, do earmarked Social Security taxes, or as they used to talk about in the old days, they'd talk about bottoming an expense on a tax, are these benefits that are bottomed on the Social Security tax equal? But the real issue, as Rudy suggested, is much more the total finances of the government and your former employer, the Treasury.  So I think there is nothing but upside in my view in getting rid of the Trust Fund.  And as I said, for the legal point about when you're authorized to pay the benefits, well, that's the law.  So if we do all this we're going to change the law anyway, and that's one more thing we'll have to change. Now for the real rate of return, it's true long term TIPS are now yielding about 2 percent.  There is a very strong bid for TIPS right now being driven by mutual funds and the very sensible fear at retail that inflation is about to go higher. But if you look over the longer term view, the 40-year average after inflation return, on government bonds, is 2.9 percent, which is awfully close to 3.  The intermediate projection case used by the Social Security trustees is 3 percent real.  And the case used in most discounting, you may have worked on them yourself, most discounting exercises for future benefits is 3 percent real. My notion is that for the very long-term sorts of TIPS we're talking about an average of 3 percent is not unreasonable, and that 3 percent, if you did the sort of thing I'm suggesting, would be offset by the use of 3 percent real in the calculation of the foregone benefits.  You want the same rate no both sides. So in that sense I don't think there is any extra cost to the government as you were suggesting. MR.          :  Insofar as people weren't going to get benefits that were growing that high, you would run out of the benefits against which to take the reductions.  And the 3 percent that the government owed on the TIPS would compound to more than it was planning to pay them on the benefits, I think, I'm not sure. MR. POLLACK:  That's very true.  And that gets around to thinking, do you really want to have an inviolable social contract or not.  Yes? MR.          :  Not at that interest rate, no. MR.          :  Somebody else thought it was low. MR.          :  Actually, 3 percent real return, certain, is a very good return.  And for some portion of your portfolio would make a lot of sense. MR.          :  Let me clarify my use of the word, subsidy.  I found other audiences don't understand it either, so I better change it.  Basically, what's going on here is that in Alex's plan and the president's plan in the very first instance people give an additional savings asset without having had to reduce their consumption at all.  And I think when you look at Social Security reform, and you don't see anybody reducing their consumption ever, the you've got to be suspicious of it. Now I admit there are ways of organizing that so that you can exploit the risk premiums that come out ahead for everybody in the long run.  But that of course means taking more risk. MR. HASSETT:  Well, thank you all very much for your attention, and we thanks the panelists.</body></html>