Dean Baker and Friends: Schooling Capitol Hill on Social Security
Dean Baker and some other fine folks made a trip to Capitol Hill last week to do a little fact-based pushback on Social Security and other programs. [UPDATE: Selise has the C-Span links.] George Miller (D-CA), the House Chair of the Committee on Education and Labor, presided over both their pre-public-hearing written testimony and the public question-and-answer period that followed. The following represents my impressions of the Q&A (note that unless I actually use quotation marks, I’m heavily paraphrasing on the fly for the most part):
Miller did the standard intro, from 10:30 to 10:42; he talked about how 401(k) plans are "high-stakes crap shoots". Personally I felt that he started to repeat himself after a while and that five of his minutes could have been better spent later on, preferably by being given to Dennis Kucinich, Carol Shea-Porter, or Joe Sestak, but that’s me.
At 10:43, Buck McKeon (R-CA) did some bamboozling about how we can’t trust gummint to do anything right. Then Miller came back from 10:48 to 10:51, introducing the first witness, Vanguard’s John C. Bogle. Bogle dissed privatization and accounts run by greedy hedge funders whose high fees eat into the money of retirement investors — and as the founder of Vanguard, I suspect he knows all too well whereof he speaks.
Dean Baker came on at 10:58 am. He talked how most people’s wealth was tied to their homes and depend on equity for retirement wealth and emergency fallback money (health issues, disasters, etc.) Per Dr. Baker, calculations show that the 45-54 baby boomers’ total average wealth (median household) has fallen from 2004 to today so much that they can only afford about half of the median price of a typical home. There’s absolutely nothing more important we can do, he emphasized, than to combat bubbles like the housing bubble. (In other words, please don’t be reinflating the housing or any other speculative bubbles.) He said that we must guard Social Security and Medicare, not tamper with them; he added that state experiments with managed health-care accounts are promising.
Dr. Alicia Munnell of Boston College followed at 11:05 am. She talked up the alleged fragility/dangers of SS and also of 401(k)s. Paul Schott Stevens of ICI at 11:10 in turn touted 401(k)s as being fine and just needing some tweaks. Vanguard’s Bogle came back at 11:15 and was quizzed by Rep. Miller on overhead costs and management fees in index and other funds. Bogle reiterated his quote, which Miller had cited in the recent past, to the effect that "the miracle of compounding returns is overwhelmed by the tyranny of compounding costs".
Dr. Munnell came back at 11:21 am — she promptly took a question from Rep. Miller who used up the last of his time with her. Buck McKeon up at 11:22 seized upon Dr. Munnell’s comment on "human beings making bad decisions" and asked how much responsibility the Federal Government should take for protecting people from bad decisions — because of course the Gummint sux sux sux at this, right? (Let ’em all rot! Social Darwinism rulz! Unless of course you’re a banker or a hedge fundie — they get the bailout, we get the cat food.) Stevens, not exactly a raging Commie himself, proceeds to educate McKeon on the reality concerning 401ks, disclosure, and not confusing mutual funds with other parts of the system.
McKeon then quizzed Baker on how we could set up government managed accounts with a 3% rate of return without a huge risk to the taxpayer. Baker pointed out that the costs would be far less than what has already been spent propping up financial titans. Baker patiently and repeatedly explained that the difference between the managed accounts and Social Security (which McKeon pretends not to know) is that managed accounts aren’t based on mandatory contribs. McKeon went over his allotted time but failed to dent Baker.
Donald Payne (D-NJ) stepped up at 11:30 and asked Dr. Baker to explain how we can modify 401(k)s so that workers’ retirements aren’t vulnerable to the whims of the stock market. Baker responded that, given the circumstances, it makes sense to either invest in government managed accounts or to expand Social Security.
George Miller then asked about the problem of people tapping into their retirement by pulling out hardship loans (presumably recklessly); Stevens replied that the average 401(k) investor is smarter than generally assumed. Miller asked about the funds performance of the Thrift Savings Program, which is open to all Federal employees. Stevens responded that the TSP is seven times larger than the largest defined-contribution plan in the private sector, so economies of scale kick in. But in case anyone might dare cotton to the idea of expanding the dirty Commie TSP to cover all Americans, Stevens, whose ICI has attacked the idea of an expanded TSP in the past, whines a bit that TSP’s actual costs are somehow hidden. What he isn’t telling you is that one reason for both TSP’s low overhead costs (30 cents per $1000 invested) and Social Security’s low overhead costs (less than $10 per $1000 invested, which compares rather nicely to the $150 per every $1000 typically charged by private-sector annuity firms) is that both TSP and SS are run largely by Federal employees (some Barclays staff help to run the four Barclays index funds, but the G fund, which is made up of government securities, is in strictly Federal hands), whose Washington, DC salaries on the GS scale max out at $153,200 a year, and are usually a lot less. When most of your top people are being paid well under $160 thousand a year, as opposed to $1.6 million, $16 million, or $160 million a year (or more), it’s easy to see why your overhead costs are extremely low when compared to the private-sector competition. (Oh, and by the way, Social Security is so highly thought of overseas that in the UK, where the Thatcherized pension-privatization scheme has been an utter knobs-on disaster, UK reformers are looking longingly at our own well-run and well-capitalized Social Security program. So there.)
Robert E. Andrews (D-NJ) takes over grilling Stevens at 11:38. He asks Stevens about decline/depreciation of 401(k) plans and mentions that measures of depreciation take into account the contributions made to 401(k)s — in other words, Andrews is subtly stating that if not for the contributions, the 401(k) balance sheets would be a lot uglier than they are. Andrews then asks Baker at 11:41 whether annuity products should be mandatory aside from having an opt-out feature included; Baker concurs and talks about how government-backed annuities would have lower overhead costs than most private annuities. Andrews asks Dr. Munnell about the difference between opting-out and straight mandatory annuities; she seems to favor the latter.
Andrews then asks Munnell about SS reform — she states that she rejects cutting benefits and pushes for growing revenues instead, by either COLA or other adjustment. Stevens chimes in and says that we need to keep Social Security around as it’s especially important to the bottom tier of society. Baker talks about removing the cap on SS taxing, which — since there’s been a big wealth transfer from the bottom to the top in recent years — would mean that more money would flow into SS than is currently projected for the tax-cap removal. Baker also talks about the Fed, Congress and White House being utterly absent when regulation was most needed.
In a final questin, Andrews asked Munnell about 401(k)s and SS — will they keep our people (especially our poorest people) afloat? She says no, hence the need for annuities.
Next, Carolyn McCarthy (D-NY) quizzed Stevens RE: the new minimum age of 70 1/2 specified for distribution of IRA funds — Stevens suggests that kicking up age for allowing funds withdrawal is a good idea; Munnell and Baker point out problems with this concept. (I’m not sure how not allowing people to take out their money when they’re 62 as opposed to when they’re 70 squares with Steven’s mantra that 401(k) investors are smarter than assumed and can be trusted to manage their money, and that shackling people with restrictions is bad. But I digress.)
Brett Guthrie (R-KY) floated Stevens a question about American workers’ historical participation in defined benefit plans; Stevens said that only 16% of past Americans had pension/benefit plans. Munnell said that while the percentage of Americans with plans hasn’t changed, the types of plans have changed.
Joe Sestak (D-PA) came along at 11:58. His first question for the witnesses went something like this: It seems to me that you’re interested more in spreading the risk than in de-bundling all the various fees. We’d like to make that apparent. Bogle answered that this was true with regard to equities, but also that part of the current crisis came about because we didn’t spend nearly enough time educating investors about risks and the need to have bonds in your investment program. Sestak then asked Bogle how we could remove the danger from an indexed approach. Bogle suggested that one way would be to avoid the pitfalls of the the past two decades, where people ignored profits-to-earnings ratios and went for speculation over actual earnings.
Next up: Carol Shea-Porter (D-NH), who asked Dr. Munnell about raising the retirement age, and to which age she was proposing raising it. Munnell suggested that 67 should be the new retirement age, as it takes into account changes in longevity over the decades. (PW butts in: Ahem. Isn’t raising the retirement age yet another of those cuts to Social Security that Dr. Munnell says she doesn’t want to make? And the whole idea that the architects of Social Security pegged the retirement age at 65 because most adults were dead by then is, though popularized by decades of conservative propaganda, utterly untrue.) Munnell also said that we need more plans than Social Security and 401(k)s — we need another tier between SS & 401ks. Shea-Porter asked her if she supported raising the tax cap on Social Security. Munnell said yes, but cautiously — there should be some link between benefits and contributions. Shea-Porter asked how would this additional tier be set up; Munnell responded that it should be private.
Shea-Porter then directed her attention to Dean Baker, asking if he had anything to add with regard to his previous comments on the housing bubble. Baker said that people were misled into thinking housing was a very safe investment — and that the demonstrated unsafety (my word, not his!) of such investments typically promoted to Americans as "safe" is why we need another layer/tier of personal investment.
Shea-Porter’s questions then ended, and at 12:08 Jason Altmire (D-PA) asked Stevens what needs to be done with regard to educating investors in 401(k) and other plans. Stevens replied that improved disclosure for 401(k)s is a need, along with better education. Also, opt-out over opt-in is a better plan. He stated that 401(k)s do dip, but generally do better than the stock market as a whole.
Next was Tom Price (R-GA), who spent his time reciting silly Heritage Foundation talking points. [Note: I originally misidentified him as David Price (D-NC), who has my profuse and sincere apologies!] "If we remove risk, we remove reward!" Gummit icky! Nationalization (eeeek scary!) makes the Baby Jesus stock market cry. Stevens took that song-and-dance and played along with it — to an extent. He stated that yes, we can’t have a single solution for everyone. He also said that "some of my colleagues think we can’t trust Americans" with their retirement (this was a dig at Baker, Munnell and their annuity plans) and also said "let’s not straitjacket" the American economy. Price’s response: Gummit icky, regulation stifles economy and hurts retirement planning. Stevens countered that 401(k)s are voluntary, not mandatory (so please STFU about implying that 401(k)s are some evil Commie plot, ‘kay?). He also said that we (meaning, I guess, the people who are actually experts at handling money) shouldn’t substitute our judgment for the investors’ judgment.
Phil Hare (D-IL) blessedly comes along at 12:18 and asks Bogle about protections in 401(k)s from greedy employers eyeing pension plans. Bogle mentions that the advantage of plans not tied to employers is that employers can’t touch them. Educating investors is important. Institutional investors did a bad job at watching our money. Tweaks Stevens — "I hate to stomp on innovation, but — I’m going to stomp on innovation" — and talks about how recent financial "innovations" enriched the providers rather than the assigned beneficiaries.
Next up was Bobby Scott (D-VA), who asked why nobody was backing an individual defined benefit plan. Bogle explained that individual plans are much more dangerous than large plans, which allow for the sharing of risks, costs, etc. Scott then asked if we could simply improve Social Security rather than adding other layers or plans. Bogle said that this was a possibility. Scott ran out of time, so he planned to submit more questions to Bogle to be answered later.
After Scott came Lynn Woolsey (CA-6), whose first comment was: "Aren’t we glad we didn’t put Social Security into the stock market?" Bogle laughingly said "Yes". Woolsey then noted that Social Security wasn’t designed to do as much as it’s doing now — and asked what sort of supplements to it are needed. Munnell’s reply: 401(k)s aren’t enough — we need another supplement. Woolsey asked Dr. Baker’s opinion; he agreed with Dr. Munnell. Woolsey then asked Mr. Stevens to comment; he said that normal behaviors over working life mean your 401(k) is OK.
Mazine Hirono (D-HI) was the next representative to address the witnesses. She told Dr. Munnell that she liked the concept of 3% guaranteed returns as discussed by Dr. Baker. Munnell replied that 3% guaranteed returns are pretty small — people need more. Hirono riposted by saying that she thought that, if this is a supplement to Social Security and not intended to be a retiree’s sole support, 3% is pretty good if it’s guaranteed.
Last but not least was Dennis Kucinich (D-OH), who made the most he could of the puny amount of time left. He asked the witnesses if, with the decline in pensions, housing values, 401(k)s — and an aging workforce and a growing number of unemployed people — are we looking at a baby boomer generation doomed to poverty? Stevens replied that no, the market won’t stay down forever. Kucinich then turned to Bogle: "Mr. Bogle, does what go down must come up?" Bogle replied that most Baby Boomers don’t have stock and can’t accumulate it in these times. (In other words, they can’t take advantage of a stock boom.) Kucinich then asked Baker: Will the Baby Boomers be poor? Baker’s reply: Very likely, especially if their Social Security benefits are cut (a zing at the "entitlement reform" cat-food crowd).
And with that, Miller adjourned the hearing.