Fed official offers dimmer private account view Fri May 13, 2005 04:23 PM ET By Tim Ahmann
WASHINGTON, May 13 (Reuters) - Private Social Security accounts are likely to provide lower returns than assumed by officials since returns will move lower as the work force shrinks and economic growth slows, a top Federal Reserve official said on Friday.
Weighing in on a topic drawing scrutiny as lawmakers mull President George W. Bush's private Social Security account proposal, Fed Governor Edward Gramlich said forecasts of inflation-adjusted returns offered by the program's trustees and actuaries are too optimistic.
"Given the GDP assumptions that the trustees are using ... I think 4.5 (percent real return on stocks) and 1.5 (percent real return on bonds) would make sense to me," Gramlich told a forum on Social Security sponsored by the National Academy of Social Insurance. In contrast, the Social Security trustees assume a 3 percent inflation-adjusted return on bonds over time, while the actuaries assume a 6.5 percent equity return.
"I think if we really did go to a world of 2 percent GDP growth we would be looking at lower real interest rates as well," Gramlich said.
Speaking at the same event, Social Security Chief Actuary Stephen Goss defended the estimates, arguing that while overall returns might be lower as the work force shrank, the return on each dollar invested should be little changed.
Goss noted that historically stocks had provided an inflation-adjusted return of 7 percent. "Will the future be dramatically different from the past?" he asked rhetorically. "We'd like to see some strong evidence of that before we assume the future is going to be dramatically different."
Bush wants to let workers divert part of their Social Security payroll taxes into individual investment accounts. Acknowledging the accounts will not address the system's long-term financial woes, he also has proposed slowing the growth of future benefits for middle- and high-income workers.
Social Security's trustees have said that unless changes are made the program's trust fund will be exhausted in 2041, tapped out by retiring baby boomers. After that date, incoming taxes will be sufficient to cover 74 percent of benefits.
In response to a question, Gramlich suggested the exhaustion date for the trust fund, which is invested in government securities, would be earlier if the trustees took as dim a view as he did on bond returns.
LONG-STANDING DEBATE. "MAGIC BUNNY"
Gramlich, who chaired a federal advisory council that looked at ways to shore up the shaky finances of Social Security in the mid-1990s, said the debate over the potential returns private investments could bring was long-standing.
"In our council meetings, I began to refer to this extra couple of percentage points as the magic bunny solution to the Social Security problem," he said. "I think we've still got a magic bunny in this," he said, arguing an economic model -- rather than history -- should be used for the forecast.
While Social Security's actuaries have provided forecasts of potential equity returns, the trustees have not.
Gramlich said it was "bordering on the outrageous" the trustees did not examine the issue since they produce the most-cited forecasts of the program's solvency and the nation was debating the program's future.
Goss said the trustees under both the Bush and Clinton administrations had not offered a view on equity returns because private accounts were not part of the current program.
Even more important in evaluating the president's plan, Gramlich said, was determining how people with different incomes and differing timelines to retirement might fare with private accounts. He said such data, which would point to potential winners and losers, was sorely lacking.