January 24, 2000 | News Releases on Social Security
"There's no question that the accounts can be structured to maximize growth while minimizing risk," analyst David John said. "Those who consider market fluctuations an excuse for not creating the accounts are only proving that they're not serious about reform."
In a detailed paper that answers the question "What if the market goes down?" John shows how to structure and regulate retirement accounts to allow workers to tap the market without being exposed to unnecessary risks.
According to John, such accounts can be financed one of two ways: "carve-outs," which would divert funds from current Social Security taxes, or "add-ons," which would be financed either through new taxes or the projected budget surpluses. Because add-ons would do nothing to boost Social Security's poor rate of return-and since proposing new taxes or relying on forecasted surpluses is politically unwise-John recommends carve-outs.
At least initially, workers should be limited to three simple investment options offering stock index funds, as well as corporate and government bonds. That way, administrative costs-which tend to rise with the complexity of the account-are kept low, John says. And with fewer options, risk is minimal and novice investors learn how to manage their money. "Since any of the three basic options would earn substantially more than the current Social Security system does, any choice would improve their retirement incomes," he writes.
Administrative costs can also be kept low by requiring investors to buy their stock or bond index funds from a federally approved list of investment managers that would compete to provide the best service, John says. To further protect new investors, he suggests emulating Britain's practice of allowing small accounts to build to a certain amount before allowing them to be transferred to an investment manager.
But the long-term success of such accounts depends largely on how they are regulated, the analyst says, and the criteria for licensing investment managers should be neither too strict nor too lax. He spells out four standards for managers: 1) sufficient capital invested in the firm to ensure stability; 2) a demonstrated level of expertise; 3) a policy of disclosing all fees and costs; and 4) a practice of providing regular statements to investors.
Due to the highly technical nature of financial regulation, John urges lawmakers not to entrust personal retirement accounts to any one federal agency, which would certainly lack the detailed information necessary to oversee the various types of financial entities. Depending on the type of account, it should be supervised by an already existing regulatory agency, such as the Securities and Exchange Commission or the Office of the Comptroller of the Currency.
Putting the Social Security Administration (SSA) in charge of regulating retirement accounts would be a mistake, John says. For one thing, SSA lacks any experience in investing. Moreover, allowing the agency to oversee the accounts could create a conflict of interest, since they would be in direct competition with Social Security itself.