Weekend Question 3: Why Are You Talking about Progessive Indexing?
Answer: Because we can’t afford to keep Social Security off the table as an issue, and progressive indexing’s chief advocate has not stopped advocating it.
It’s good to see that Robert Pozen is still talking up progressive indexing (link requires paid subscription), in a speech covered Tuesday by Investment News:
Pozen: Indexing can fix Social Security
The window for social security reform is still open, but it is rapidly closing, according to Robert Pozen, chairman of MFS Investment Management Inc. in Boston, speaking yesterday at the Discover 2006 conference in Denver.
….. “This is not a question of analytics or finances, it’s a question of political will,” he said. “If President Bush is thinking about his legacy, he might want to start thinking about social security.”
With the social security system on track to start running a deficit by 2017 and likely to go bankrupt by 2041, Mr. Pozen proposed a “progressive indexing” formula as the “fairest way to achieve solvency in social security.”
The general idea is to slow the pace of social security benefit growth to the middle- and higher-income wage earners by shifting from a payout based on wages to one based on pricing.
For those people earning less than $25,000 annually at retirement, the social security benefits would still be based on wages, and for those earning $113,000 and above the payouts would be pegged to a price indexing model, which grows slower than wages.
For those individuals falling in the middle the payout formula would include a blend of wage and price indexing.
Mr. Pozen, who calculated the social security system’s deficit to be at $3.8 trillion, said his formula would reduce that figure to $1.2 trillion over the long term.
For the record, I don’t believe that progressive indexing is a better solution than individually controlled private investment accounts. But Pozen at least addresses long-term system solvency in a manageable way without any kind of increase in the FICA tax — something those who applauded yet another year of inaction on Social Security reform as a good thing at January’s State of the Union address can’t say.
Voo-Doo “screw you” system if you ask me. What’s wrong with providing a piece of security for younger people who feel “used” when the current system or THIS “mush” is used. As so many have noted - we’d be so much better off at this point if investing had been taking place all along.
Comment by chrys — July 23, 2006 @ 1:32 pm
#1, I basically dont’ disagree. If the indvidually controlled accounts came into play and performed as expected, people would be clamoring for the right to invest more of their FICA taxes in their own accounts.
Comment by TBlumer — July 23, 2006 @ 2:41 pm
It’s easy for you as someone with a high degree of financial literacy to sing the praises of private investment accounts. You can read and interpret cash flow statements, balance sheets, and income statements. You can assess the impact that asset turnover has on a company’s share price. The average person, however, can’t or are unwilling to do that. As evident by recent bankruptcy filings, the retirement security of Americans can no longer be satisfied by corporate or union pensions. Retirement plans such as 401k’s are great, but far too often people don’t understand them and are hestitant to participate in them. There was some talk last year about adding such measures as progressive indexing, increasing the max on SS earnings, and requiring 401k plans to be opt-out instead of opt-in. It’s ludicrous to think that we can completely privatize our program for national retirement security. It’s failed in Chile and would fail here with disastrous consequences.
I think what Pozen suggests is a very comfortable compromise for people on all sides of this issue. Certainly private accounts can provide account holders with the highest amount of return on investment; but it could also cause the inverse. Pozen came from such MF/retirement companies as Fidelity and MFS. If anything, he should be promoting private retirement accounts as the centerpiece of the “save social security” plan, but he is not. What Pozen is offering is a solution that stops the bleeding and puts us on a better path to preserving SS.
Comment by Kevin Irwin — July 23, 2006 @ 5:42 pm
#3, the problem is that people don’t understand that individually controlled accounts would be limited to just 5-8 predefined INDEX MFs — probably a large cap, small cap, bond, cash, international, and maybe a G&I and aggressive. The point is that people in these investments would simply get in and ride them, as people should do with 401s. The fact that they are preselected index funds would keep the financial planning rogues from ruining it for people, as it has in some cases in England. Chile is using an index-fund methodology, and it is working out much better with a population that I would expect is not “smarter” than ours.
I would not support individually controlled accounts except under arrangements just described for the reasons you just named. I would even support defaulting the asset allocation and controls on the max % that can be in any one alternative as further controls.
The thing that’s sad about progressive indexing is that it perpetuates the social contract FDR imposed, which is that one generation is supported by the previous two in their retirement. Private accounts provide the possibility that we can break away from that in the long, long term.
Comment by TBlumer — July 23, 2006 @ 5:56 pm