November 9, 2005
The Economics and Possible Solutions to the Social Security Problem
B. Malkiel
Professor of Economics, Princeton University
Minutes of the Ninth Meeting of the 64th Year
President William Haynes called to order at 10:l0 AM, the ninth meeting of our 64th year. The invocation was led by John Marks.
Joe Giordamaine gave an erudite and clear review of the previous week's presentation on stem cell research by Dr. Ira Black.
President Haynes announced the availability here of William Selden's monograph on the history of our organization.
Don Dickason introduced the speaker, Professor Burton Malkiel. Dr. Malkiel received his A.B. and M.B. A. degrees from Harvard and his PhD here at Princeton. He has served as the Dean of the Yale School of Management, on the President's Council of Economic Advisers. He has received many honors and published extensively. His most popular book is "A Random Walk Down Wall St." His talk was on the Economics of and the Possible Solutions to the Social Security Problem.
He noted that in 1950 the ratio of workers to retirees was 16:1, that now it is 3:1 and that in the 2020's it will by 2:1! Since 1940, male longevity has increased from 62.8 to 75.4 years and female from 67.3 to 78.2. The average initial benefit now is 14,800$ and under current laws it will be 27,700$ by 2075 in 2004$'s. He explained his Rule of72. At 1% per year money will double by 2075. If you divide 75 by the relevant interest rate, you will learn how long it will take for your money to double.
Some tinkering with the system was done in the Carter Administration. It made the yearly benefit estimations relate to prices not wages as the former increase more slowly. The initial benefits were and are tied to wages. More tinkering was done in 1973 by the Greenspan Commission. It raised the tax rate and lowered the initial benefit and let it approach the full rate at age 67 so slowly that even now it is only at age 66. If demographics hadn't interfered, the problems would have been solved. Even without private accounts, Dr. Malkiel said there were things that could be done. The year to year indexing could be changed from prices to wages. This may be unfair to the poorest. Secondly, the initial benefits could be indexed progressively, so that the lowest earners would be at current calculations and the wealthier would begin lower inversely to their lifetime earnings. An increase in payroll taxes is possible and there is worry it would affect employment negatively. The taxable ceiling could be raised. And the initial age could be raised to 67 for instance. This might not be such a bad thing. Summarizing, the system could be fixed without private accounts.
His plan is based on the one proposed by President Bush which seems dead at the moment. There would only be two choices, 2/3rds equities and 1/3rd bonds or the opposite. The inputs would be dollar cost averaged over years. There would be a life cycle component so that in later years, bonds would outweigh equities for everyone. All Investments would be In Index funds and Dr. Malkiel gave examples of how practical it is to manage the system for one basis point or maybe even less. He showed evidence that the worst return would be just under 5%.
He then described the current game of "chicken" in Washington. Basically the opponents demand there be no increase in taxes and no private accounts. But they have not come up with any solutions. He added that forced savings might appeal. It would be sort of out of sight out of mind.
There was a short Q&A period. One basis point is realistic. Initial benefits vary because we earn varying amounts in our working lives. The Chilean experience teaches us not to allow too many choices. The meeting adjourned at 11:35 AM.
Respectfully submitted,
Jerome K Freedman, M. D.
Joe Giordamaine gave an erudite and clear review of the previous week's presentation on stem cell research by Dr. Ira Black.
President Haynes announced the availability here of William Selden's monograph on the history of our organization.
Don Dickason introduced the speaker, Professor Burton Malkiel. Dr. Malkiel received his A.B. and M.B. A. degrees from Harvard and his PhD here at Princeton. He has served as the Dean of the Yale School of Management, on the President's Council of Economic Advisers. He has received many honors and published extensively. His most popular book is "A Random Walk Down Wall St." His talk was on the Economics of and the Possible Solutions to the Social Security Problem.
He noted that in 1950 the ratio of workers to retirees was 16:1, that now it is 3:1 and that in the 2020's it will by 2:1! Since 1940, male longevity has increased from 62.8 to 75.4 years and female from 67.3 to 78.2. The average initial benefit now is 14,800$ and under current laws it will be 27,700$ by 2075 in 2004$'s. He explained his Rule of72. At 1% per year money will double by 2075. If you divide 75 by the relevant interest rate, you will learn how long it will take for your money to double.
Some tinkering with the system was done in the Carter Administration. It made the yearly benefit estimations relate to prices not wages as the former increase more slowly. The initial benefits were and are tied to wages. More tinkering was done in 1973 by the Greenspan Commission. It raised the tax rate and lowered the initial benefit and let it approach the full rate at age 67 so slowly that even now it is only at age 66. If demographics hadn't interfered, the problems would have been solved. Even without private accounts, Dr. Malkiel said there were things that could be done. The year to year indexing could be changed from prices to wages. This may be unfair to the poorest. Secondly, the initial benefits could be indexed progressively, so that the lowest earners would be at current calculations and the wealthier would begin lower inversely to their lifetime earnings. An increase in payroll taxes is possible and there is worry it would affect employment negatively. The taxable ceiling could be raised. And the initial age could be raised to 67 for instance. This might not be such a bad thing. Summarizing, the system could be fixed without private accounts.
His plan is based on the one proposed by President Bush which seems dead at the moment. There would only be two choices, 2/3rds equities and 1/3rd bonds or the opposite. The inputs would be dollar cost averaged over years. There would be a life cycle component so that in later years, bonds would outweigh equities for everyone. All Investments would be In Index funds and Dr. Malkiel gave examples of how practical it is to manage the system for one basis point or maybe even less. He showed evidence that the worst return would be just under 5%.
He then described the current game of "chicken" in Washington. Basically the opponents demand there be no increase in taxes and no private accounts. But they have not come up with any solutions. He added that forced savings might appeal. It would be sort of out of sight out of mind.
There was a short Q&A period. One basis point is realistic. Initial benefits vary because we earn varying amounts in our working lives. The Chilean experience teaches us not to allow too many choices. The meeting adjourned at 11:35 AM.
Respectfully submitted,
Jerome K Freedman, M. D.