View Header


                     Office of the Press Secretary
                       (Albuquerque, New Mexico)
For Immediate Release                                      July 27, 1998
                         REMARKS BY THE PRESIDENT
                         University of New Mexico              
                         Albuquerque, New Mexico        

12:48 P.M. MDT

MS. BORGER: Thank you. I'll be asking some questions today, I'll be taking questions from the audience, along with Matt Miller and Susan -- who are out here with me. But I guess I'd like to take the moderator's prerogative to ask the President the first question, and it's about an interesting poll that appears in USA Today this morning, Mr. President, in which voters said -- two-thirds of the voters said that they liked this idea of private investment accounts, but most of them also say that they don't want the government investing their money for them. So how do you explain that?

THE PRESIDENT: Well, I think there are a couple of explanations. First of all, we live in a time where people are using technology to become more and more self-sufficient and to get more and more information directly. I mean, the Internet is the fastest growing communications organism in human history. So I think that.

Secondly, I think there's always been a healthy skepticism of government. And thirdly, the government hasn't been in very great favor over the last 17 or 18 years, although it's doing better now than it was a few years ago.

Now, I think -- in public esteem -- all the surveys also show that. I think the real question is, from my point of view, we ought to get down to the merits of this. The first question you have to ask yourself is, should a portion of the Social Security tax funds go into securities, into stocks. And if they should go into stocks or into corporate bonds, should that decision be made according to individual accounts, or should they be invested en masse either by the government or by some sort of non-profit, non-political corporation set up to handle this.

And I think there are genuine concerns. For example, if the government did it and they invested the money in stocks, would private retirement funds just have to make up the difference by buying government bonds, or would there be no aggregate increase in saving or investment in the country? Would it give the government too much influence over any company or any sector of our economy?

But I think most people just think if there is going to be a risk taken, I'd rather take it than have the government take it for me. I don't think it's very complicated, so I think that those who believe that it's safer and better for people to have the public do the investing -- or the government do the investment -- have to bear that burden. Those who favor, by the way, having individual accounts, have to ask what happens to people who happen to retire after the market has gone down for five years. So there are problems with both approaches -- and benefits.

Q If individual accounts are set up, for many they will be come exhausted either by old age, bad investments, or turned down in the market, or all three of those things, but they won't last forever. Will there be a guarantee of current benefits by the government? If so, what problem have we solved, or have we simply created another problem? If not, are we simply creating a system that is inevitably going to plunge a lot of very old people into poverty? (Applause.)

THE PRESIDENT: Well, why don't we let -- I think those are good questions, but I think there are answers to them. And maybe I should let either Dr. Weaver or Professor Boskin answer, and then if I want to add anything, or any of the members do, we can.

DR. WEAVER: I'll just make an initial reaction, which is, as to the accumulation not lasting forever, presumably, you mean there that the individual has chosen not to purchase an annuity. And in most of the discussions about personal accounts, there have been concerns that a least a portion of those accumulations be converted into some type of annuity or withdrawn on a phased basis to ensure that the individual does not exhaust those funds.

PROFESSOR BOSKIN: That's exactly correct. Just for those of you who don't know the term, an annuity is an annual payment, perhaps monthly, that goes on for the rest of your life. And for families, they would probably be joint survivor annuities. And most of these proposals would require or strongly incent people to -- once they've accumulated their private accounts, when they start taking it out -- as annuities or to maintain an amount that's sufficient for them over their time period.

Now, it is important to understand that as this is going on you can't maintain the current system not only for the current retirees, but for people who are now just being born and people who are 10 and 20 years -- pay all those benefits plus the individual accounts. We're trillions and trillions and trillions of dollars in the hole if we do that.

PROFESSOR DIAMOND: I'd like to add something to that if I could. If individuals when they retire go to an insurance company and buy an annuity -- that's a promise that the money will last forever -- the first question is, will they be able to buy annuities that keep pace with inflation? Will they choose to, or might they be required to, and what will this cost? We talked earlier about the cost in the accumulation process. And I talked about 20 percent decrease in benefits from the cost of accumulating.

There's an extra cost in paying the insurance companies over and above what they will pay back for buying annuities. The current best estimates of that cost are an additional 10 to 20 percent on top of the 20 percent cost of the accumulation. So that solution has with it a cost element. There's also the question, will future Congresses, when people are clamoring to get early access to their money after they've retired, will future Congresses continue to require everybody to buy these annuities? Maybe yes, maybe no. That, it seems to me, is a major political question.

SENATOR DOMENICI: I think maybe this is a time to clarify something, to qualify something. The question gets asked, what happens if the stock market busts. And we've had a few of those; the others have been ups and downs. I think anybody that's seriously proposing individual personalized accounts are talking about a very long-term investment. The senior who are currently on retirement and those close to it are going to be protected without any question.

One of the guidelines that probably would be imposed on a firm who was going to take money and invest it would be that in the last five years, or maybe event the last seven years prior to retirement, that they would be required to make a completely different investment at that time, versus what they had been making for 30 years. I think most people assume at that point the investment for the remaining years would be in very, very less risky accounts of one kind or another. And I know that's in Dr. Martin Feldstein's plan, that you would not get a downturn at the end because it wouldn't be invested in that kind of stock.

PROFESSOR BOSKIN: One fact is worth mentioning here, which is that even -- following up on Senator Domenici. If you take any 30- or 40-year period in American history, in the last 100 years, and people had invested all or a sizeable part, or half of their investments and equities year after year, as opposed to in bonds, even if the year they retired was the year of the 1929 stock market crash or the much more mild 1987 stock market crash, they would have had accumulated vastly more than if they had been investing in bonds. And we had the issue of education come up earlier. The least literate investment policy is to have the trust funds be 100 percent in government bonds.

Q I just wanted to ask some of the academic experts if there was enough information available on some countries that have already tried this? For example, I hear about Chile and Australia. What has been the experience in those countries both in terms of the costs and the benefits and the risks of setting up private accounts, and also in the sense that I've heard, for example, in Chile, of letting the popular people engage in the capital markets and giving them a greater sense of participation in the capital markets -- not just the wage labor markets.

THE PRESIDENT: I would invite everybody to comment on Chile and Australia and maybe on the UK and now on Canada, since Canada is investing the money directly. And maybe if you all could give us whatever information you have about that -- in whatever order.

Jim, do you want to start?

REPRESENTATIVE KOLBE: Well, let me just start off by saying, yes, Chile is kind of the grandparent of all of this. They started -- they were the first to do this, although Britain also did it just about at the same time. Very different kinds of systems. In Chile, they went to total privatization, which is very different than any plan that I've heard seriously talked about here -- that we're talking about where it's a very partial or very modest part that would be invested in individual accounts or that the government would invest on its own behalf.

The success has been good in Chile, although they've had a bad economy, thanks to the copper prices in the last couple of years. And so the investments haven't done as well. But they have, over the last 18 years, done quite well.

In Britain, they have been very pleased with it. Australia has been very pleased. You also now have Mexico, and most of Latin America now has followed Chile's lead and gone into a system of individual investments, individual accounts.

You have to remember, though, in Chile, where they went the whole way, that the benefits the people would get from the system in Chile before they went to this were so minimal, it wasn't very hard for them to say, I'll take the risk and give it up because they really weren't giving up very much.

PROFESSOR DIAMOND: Mr. President, let's start with some of the numbers on Chile. Ten percent of payroll goes into your individual account, and you have to pay on top of that an additional amount to pay for disability insurance, to pay for survivor insurance, and as a commission to the firms that are accumulating that money.

The commission is about 2 percent of payroll, or about 20 percent of what goes into the account. It's like a front load of 20 percent. And the one percent number, that's a typical mutual fund number here -- one percent per year over a 40-year career is like 20 percent collected up front. So the costs in Chile are high. In Chile, they're very concerned about the costs. The regulator has just changed some regulations hoping to get the costs down. It hasn't happened yet. The people are certainly enthused about the system -- what they had before, as you said, was a disaster. They had 24 separate Social Security systems, very high administrative costs, better systems for white collar workers than blue collar workers, the kinds of mistakes that our system has avoided right from the beginning. The rate of return was very high, but for the first five years, all of the money was 100 percent in government bonds or government-owned bank accounts. So the rate of return was high, because all interest rates were high. It wasn't wonderful investment skills.

In Britain, which is a voluntary opt-out system -- people say, well, the costs are high in Chile, maybe it's bad regulation, maybe it's an underdeveloped country, so let's look at Britain. The costs in Britain are noticeably higher than the costs in Chile. And in Britain, since it was a voluntary system, the various insurance companies, banks, and mutual funds that were hoping to handle this money, were very active in convincing people that it was a good idea to opt out and particularly a good idea to come to them. In the British press this is referred to as the mis-selling scandal, and there are billions of pounds that these firms are going to repay because of a violation of the general fiduciary obligations of the firms.

Australia -- if you'll excuse my running on, but I've written about all of these countries, and you know what an academic is like on something he's written on. In Australia, the mandate is not on the worker. The mandate is on the employer. Every employer must set up a system. The employer can set up, if the employer has a large enough defined benefit system, the employer doesn't have to do anything. Otherwise, the employer has to set up a defined contribution system, get trustees to run it. Some of them give the workers no choice at all, the employer picks the portfolio. Some of them, the workers get choices similar to our 401(k)s.

For low-paid workers, small employers, they've got a major problem. The costs of running the small accounts are very large. The costs of running the accounts from the large employers are reasonable -- a bit less than the one percent a year are the numbers I've seen, but then, they're getting the economies of scale from the large employers.

So all of these countries are showing high costs and that problem, it seems, is pervasive. In Australia, they haven't put in any regulations requiring people to slow down the spending of the money. So in Australia they can run through the money right away and start collecting from the government for the poverty support, or they can run through it and a survivor can be left with nothing other than the government money.

REPRESENTATIVE BECERRA: I must just caution, in looking at other countries, it's useful to see how they do, but in the end we have to remind ourselves the United States of America is a far different country than any of the others. We're larger, we're more diverse, we have a different political system, and we have a different history with Social Security. So, ultimately, what we do has got to be a unique, American solution. (Applause.)

MS. WEAVER: I would certainly agree with that, but Peter seems preoccupied with costs and I think it's worth elaborating on the benefits. Certainly in the Chilean system the benefits are broadly perceived to have exceeded the cost. Clearly, when you have to purchase your services, whether from mutual fund or any other private service, you have to pay for those costs. And the costs are generally believed to have been well exceeded by the benefits, at least by the Chilean people.

As you may know, every Chilean worker that participates in this system has their own passbook. They know precisely what they own, what they're accumulating for retirement. They can go to a machine that will tell them how they can adjust their savings and adjust their retirement date, so there are many other benefits worth thinking about.

Just another quick point on the mutual fund fees. Peter has said several times today about the 100 basis points for a typical mutual fund. If you get into a nice broad-based indexed equity fund, for example, you would be looking at fees of 20 to 30 percent of that.

Q Everybody here has been talking about the fees associated with the privatization and the individualization of accounts, but can we not, as a government, and as a people, rely on watchdog organizations to either cap fees or allow an X amount of profit per transaction, or something to ensure that nobody is getting rich on this?

THE PRESIDENT: Well, I think maybe Mr. Boskin, haven't you commented on that before? I think Michael has -- at least I believe, in the preparation I did running up to this, that the most forceful advocates of individual accounts have recognized that it might be necessary to have some kind of limit on the individual administrative costs.

One of the problems in Chile has been that they've got all these different people competing for your account. And if they're competing to give you higher return for lower costs, that's good. They offer people vacation trips and then when the market is down maybe them offer them toasters, I don't know. But there are a lot of built-in costs, and you might be able to get the best of both worlds at least on the costs -- that is, to have the individuals do the investments, make the investment decisions. I think there would be ways to put caps on the aggregate costs.

PROFESSOR BOSKIN: I think what you need to make sure you did, because of the fact that some of the costs are in the nature of a fixed amount per account, to make sure you didn't disproportionately hurt people of low incomes putting only a small amount in, you'd have to have some requirement of the fees being uniform and things of that sort.

But we rely on competition to keep costs down and it does a great job in a lot of other arenas. The costs for mutual funds have come down. While we still have a third or half of Americans who aren't in stocks and bonds and we need to spread that, we have a vast increase in the fraction of the population that is because of the growth of mutual funds our well-developed financial markets. That's a great achievement.

PROFESSOR DIAMOND: Let me just pick up on what Mike said. Notice the scenario here. We start by saying we don't trust the government, so we don't want the government to be making the investment. And then the next step is, oh, well, the market won't do so well, let's have the government regulate the markets. (Applause.) And we'll introduce regulations on the fees, but then we know that the firms will want the big accounts, not the small accounts, so we'll have to regulate that. And then it gets tricky -- how do you regulate a CD?

THE PRESIDENT: In fairness now -- I should say, I'm very grateful for a lot of the work that Professor Diamond has done and I'm very sympathetic with a lot of it. But I don't think that's a very good argument. I mean, we have a Securities and Exchange Commission to regulate the stock market. We have more than one federal agency that overlooks various aspects of what our banks do. And one of the reasons that our market economy works so well is that we have basic government intermediary institutions that set rules and regulations and parameters. And that's how we get the benefit of the market without having to bear all the downsides.

So I would think that nearly everybody would want some sort of government regulation if we were to get into this. (Applause.) But that doesn't necessarily mean that direct investment by the government would be better than the individual investment. It doesn't answer the question one way or the other. I don't mean that it -- but I think that, to me, that's not a reason to attack this. I think we should all -- that's what we do in almost every major area of our national life.

PROFESSOR DIAMOND: Mr. President, you've made a very important point. Our capital markets are the best in the world because they're the best regulated in the world. But when we went through a period of deregulation in the '70s and the '80s, the focus of deregulation was deregulation of prices, where the regulatory process tended to raise prices. Absolutely, if we have individual accounts we need additional regulation and that would go well. What I'm concerned about is regulation about prices, not regulation about safety and soundness of financial institutions. (Applause.)

THE PRESIDENT: You all may want to ask some more questions -- I don't want to interrupt anymore. But I think It's important. We're not just talking about price here. One of the major issues is sometimes I think we get into one little thing and we forget how it fits into the big picture. So let me just back up.

Suppose you took -- I'll take the simplest case -- suppose you said we're going to give everybody one percent of payroll to invest in an individual account, okay -- and we're going to take all the rest of the payroll and keep on paying Social Security, but we're going to reduce the basic guaranteed benefit both because we can't afford it because of what's happening to population and life expectancy, and because we just took a percent out of payroll. That's the bad news. The good news is we think you'll get a bigger benefit out of the one percent. Right? That's the argument here.

Now, on the administrative costs, what you have to figure out is, it will be more expensive administratively -- I don't care what we do -- than having the Social Security administration or the government run it all. Why? Because of just economies of scale. But if you get a much bigger rate of return, then you're still ahead.

So what you have to do is calculate all these things. And all these folks in Congress here are going to have to figure it out, too. So I just ask you, don't forget what the framework here is. And one big thing we haven't discussed is -- although our panelists did while I was out of the room, because I watched them -- it's not just the administrative costs, it's what are the range of investment decisions that will be available to American citizens for their payroll tax in their individual account? Are there any investment decisions they won't be able to make. And then, how will they get the information necessary, the advice necessary to make good decisions and how is that figured into the costs? I think you have to look at it like that. What you want to know is, where are you going to come out on the other end of this deal in all probability.

MR. REISCHAUER: Mr. President, I think that's quite right, on average. But everybody isn't average. There will be some who do very well with their private account and certainly do get much better returns. The average person might also.

But there will be many who invest unwisely or are unlucky, for one reason or another. And the question is what happens to them. Their Social Security benefit has been reduced and this additional account doesn't pay back what even Social Security would have paid back. And so we want to keep this balance. There is no Lake Woebegone effect here. Everybody can't be above average, everybody can't even be average unless we restrict very carefully what people invest in.

REPRESENTATIVE KOLBE: Just one sentence, Bob. You're right. But the point is that they won't be worse off by having this than they would be in the current system.

MR. REISCHAUER: No, they can be worse off. They can very much be worse of if they make stupid investment or they're unlucky.

PROFESSOR BOSKIN: If, but only if, you reduce their Social Security benefit dollar for dollar for this. There are a variety of proposals that would do that for some people, but would not do it for people at the bottom with any guarantee.

MS. BORGER: Mr. Boskin, let's try and take another question here from an audience member -- another high-class individual who is 68 years old. Go ahead.

Q Shame on you. You shouldn't have said that. (Laughter.)

MS. BORGER: We're all in this together.

THE PRESIDENT: I don't believe that.

Q I have a question, I have a solution, and I have a statement. I'm going to make my statement first. I believe that the people who are advocating privatization are just like the tobacco people who are the ones that garner the big money with their programs. (Applause.) I think the Wall Street brokers are the ones that are going to make the money. My question is this, and it's to the economists at the table, who's going to pay for this privatization? Billions of dollars it's going to cost to do that transition, from where we're at now into privatization.

My solution is right under our very nose. And Mr. President, I think that I'm going to address this to you. The federal government has in place for its employees what they call the Federal Employees Retirement System, FERS, which incorporates these three elements in their pension plan: a tradition pension, Social Security, and a private investment plan. Why can't we follow the Fed's example? Thank you.

REPRESENTATIVE KOLBE: Very quickly, thank you. That's exactly the plan that I outlined to you before, the thrift savings plan, which is the private part of the 401(k) part of the federal employees. How may in here are federal employees that are involved in that? Yes, you know what we're talking about there. That's exactly what we're talking about, taking that portion and doing that for Social Security. So, you're exactly right. You could have exactly a solution like that.

THE PRESIDENT: Go ahead, Michael.

PROFESSOR BOSKIN: I think you raised a good question about the costs of transition and they're important to get those right and to try to minimize those. However, it's very important to understand we face huge unfunded liabilities in the current system -- trillions and trillions and trillions of dollars. If we go on the way we are today, we have to have trillions and trillions of dollars of tax increases that will wreck the economy, or substantial reductions in the growth of benefits out there in the future.

The idea is, even though there might be some costs of transition, as the President and others have said, to set up something and take some of that pressure off, builds up, compounds at a higher rate than we're getting now, and has benefits that exceed these costs that are substantial, and reduces the costs involved that we have not funded in Social Security so far.

THE PRESIDENT: Maybe I could say this at a little -- I keep trying to get back to the basic thing. If we don't do anything, sometime in about 35 years, we're going to have to -- Senator Domenici said 50 percent -- I think it comes a little later than that, 50 percent -- but let's say in 2030, we run out of money. We're going to have to do one of three things. We're either going to have raise payroll tax by quite a lot, we're going to have to cut benefits by quite a lot, or we're going to have to have the government stop doing a huge percentage of everything else its doing, most of which are things that you believe we should be doing, and just put the money into Social Security.

So we really got into this whole discussion, both if you take Professor Reischauer's view that the government should invest more in equities to get a higher rate of return, or the view expressed by Dr. Weaver that individual accounts should do it -- we got into this discussion to figure out whether we could have, at acceptable risk, a higher rate of return on the money that's already there so we wouldn't have to raise taxes, cut benefits dramatically, or shut down a whole lot of the rest of the government. So there's going to be a transition cost regardless.

Now, one of the things that I want to compliment all these members of Congress here for doing, we want to avoid having to have a big tax increase for the transition, which is why we're trying to hold on to this surplus we've got for the first time in 29 years, because whatever we decide to do with this, we're going to have to commit a substantial part of the money that has been accumulated -- or will be accumulated -- to fund that.

And I want to ask you one question. Are you saying that you would support some portion of the payroll tax being made available for individual accounts if retirees, or future retirees -- savers, workers -- also had the option to opt into a system like the one we've got, so you could choose the one we have or you could choose one with a smaller guaranteed benefit and more investment? Is that what you're saying? I just want to make sure because I think that's something we need to know.

MR. REISCHAUER: You can't really have a voluntary opt-in system, because those people who would do better opting out of the system, will; those who won't will stay in the existing system and the total cost of the system will be much larger than it otherwise would be. By and large, high-income President people would opt out, as we heard this morning. Then they pay higher taxes relative to the benefits they receive and part of their taxes go to support those who have lower earnings.

Just so people don't think that the federal employee system is nirvana, I happen to be a former congressional employee so I am under it, or a piece of me is under it, and it consists of Social Security, first. You pay Social Security taxes, you get Social Security benefits. Then there is the thrift savings plan on top of that, which is like a company 401(k) plan, no different. Well, what if we cut Social Security? People might think, well, that 401(k) plan isn't as adequate as we thought it was before. We haven't really solved the problem. (Applause.)

SENATOR BINGAMAN: Mr. President, I wanted to just focus on the issue Bob Reischauer was talking about a little before, because it seems to me some of the proposals out there sort of promise more than I believe they're going to be able to deliver in that they say, look, we're going to be able to maintain the basic benefits that we now have in the Social Security system; we're not going to have to raise the retirement age to 70, we're not going to have to cut the COLA. But at the same time, we're going to have money, somehow or other, available to put into these individual retirement accounts.

I don't know how you get it all done. It seems to me that if you're going to take money to put in the individual retirement accounts out of the payroll tax, you're going to have to have cuts in benefits, you're going to have to have an increase in the retirement age. And if there's some way to get from here to there without those cuts and without that increase in the retirement age, I'd be glad to know about it.

Q Well, Senator Bingaman, I can tell you that Professor Martin Feldstein has a plan. It's not completed, but it's about 95 percent completed, and it does just what you've said. There is no cut in any benefit. There's two percent invested. And there is -- in fact, there is a high probability when he's finished that you can guarantee the same benefits you're getting. Because the point is -- the point is you expect to do better, and if you do better then you can obviously guarantee that everybody will get what they've got.

Now, if you're investing proportionate to the last 50 years -- take out for boom years -- if you're there long enough you expect to get between 5 and 5.5 percent interest. And so you can do both. In fact, he's done it on paper.

MR. REISCHAUER: But there is a very important issue here, and that is Professor Feldstein has taken the surpluses that we will have for the next 20 years and put them into private accounts. We could take those surpluses and put them into Social Security, invest in the same types of assets that the private accounts would be invested in and be even better off. (Applause.)

Q Well, look, he's saying you use that money for the transition money that the President just spoke to. The President said we've got to save the surplus because we don't know how much we need in transition.

Now, he'd use it in transition to perfect the personal account which he says will work; you would use it to put in Social Security and have the government invest. So you're back to the issue of which is better -- having the government invest or the individual invest in accounts that have been somewhat restrained.

Incidentally, the accounts are not going to permit people to buy every kind of speculative stock. They're going to be within guidelines established by someone, so the government will be in the regulation of what you get to buy.

Q Mr. President, may I ask a question on this? I'm confused now. These transitional costs are big and if we're talking about investing the surplus to help pay for those transitional costs, I'm lost, because my understanding is that those surpluses are already Social Security funds. And with those Social Security funds already being invested -- and we're told over the next 10 years, 98 percent of the so-called surplus that we'll see over the next 10 years of $1.6 trillion, is Social Security monies already being provided by working men and women -- there is no surplus to talk about that isn't Social Security money.

So you're taking -- it seems to me, there's a shell game going here. You're taking Social Security surplus --(applause)-- money and calling it a federal budget surplus and saying, and we're going to use this to pay for the deficit in Social Security. Well, you can't take money that isn't enough already to cover Social Security into the future and say it's going to pay for the cost of covering Social Security into the future. You've got to recognize that the Social Security trust fund surpluses that are going to accumulate over the 10 years, 20 years, are why we have a budget surplus. And we really don't have a budget surplus, apart from Social Security, that we can take that money and use it to try to make up the deficit in Social Security. So I'm a little bit lost. (Applause.)

THE PRESIDENT: The point is, though -- I agree that we have a surplus because, basically, we're still getting more money every year in from Social Security taxes than we're paying out in retirement on a current basis. And the money, therefore, is invested in bonds and when it pays back, the government has it to pay retirement later.

But -- so that's fine. But the real question is, can we get a higher rate of return in the future for a fixed amount of money that's going to be invested by the American people in their retirement through the taxes of their employers and themselves than we have gotten in the past? Because if we can get a higher rate of return, then even though there will be fewer people working compared to the people retired, people can have a comfortable, decent retirement; we'll be earning more for the money we've got. That's really the question. Is there a safer way to do that?

Now, I'd like to ask Mr. Reischauer a question, then we'll go back to the audience. You make a very compelling argument that economically there's no difference in having individuals do it and having the government do it, or having the government set up somebody to do it, except that there's far less risk on the individual, you can average the benefits, and if somebody retires in a bad year or if there's five bad years in a row -- like in Japan, which eight years ago, everybody would say we should do everything they do; now for five years, their stock market has lost half its value -- if somebody has five of those bad years, if the government is doing it in the aggregate, it is true that over any 40-year period, the return will still be greater -- even in Japan I think that's true, even now -- but you protect people from those bad years, as well as from their own mistakes.

How will you ever convince the American people of that, since they always believe the government would mess up a two-car parade? (Laughter and applause.) I mean, even if you're right, politically, how do we ever -- how do you make that sale to the American people?

MR. REISCHAUER: Well, Mr. President, it's not in my job description to defend the federal government. (Laughter.)

THE PRESIDENT: Well, you tell me how to do it then.

MR. REISCHAUER: But I, quite frankly, do have a great deal of faith in our government and in the innovative ways we have gone about creating institutions publicly to serve our nation. One of them, as I mentioned, was the Federal Reserve Board, which is responsible for monetary policy, which is a highly sensitive policy in America -- it can throw people out of work immediately by raising interest rates.

I think we can set up such an entity that is protected from interference of politicians and, by law, is required to invest passively. In other words, it's not playing the market, it's not picking this stock versus that stock, it's picking a little bit of all the stocks and bonds that are available. And, as such, it would be separated from the political forces that swirl around in Washington -- and get that better return.

If I didn't think that was possible, I wouldn't go forward with this at all -- for a minute. If I thought you couldn't develop an institutional structure to protect investments from political interference I think it would be a terrible mistake. But I think we can.

Q First of all, I'd like to say "mega ditto" to Mr. President, from Albuquerque. And it's quite obvious the baby boom and the older generation are very influential. Who is going to make the final decision if there is no bipartisan agreement?

THE PRESIDENT: Well, I think what we're -- let me just say what the good news is about this panel. You may leave here more confused than you came in about the details of these options. And if so I would tell you that's a good thing, not a bad thing. I've been working very seriously on this for a couple of years; these are complex problems. But I think that there is the good news here, which is that most of us have been on opposite sides of a bunch of issues over the last 20 years, and we all believe that we have to act now rather than later.

Keep in mind, every year we let go by, all options become less attractive and require greater risk and more exertion. So, as compared with 10 years from now, anything we would do today is quite modest in scope and has the opportunity to build in more protections. And because you're 32, I think I should also emphasize that under all these options, nearly everybody believes we have to guarantee the system as it is for people, let's say, at 55 and up, and then some period of transition, and ultimate protections built into the system over the long run.

So I think that you don't have any guarantee. If nobody ever makes this decision, then 35 years from now the system will run out of money and the market will make the decision. I mean, people will stop getting checks, or there will be a big tax increase, or we'll shut down a whole bunch of the government to pay the difference.

So that's why I think that you should feel good. There is a big bipartisan consensus, I think, in the Congress that we have to reach agreement, and we have to act, and we have to do it soon.

MS. BORGER: Anybody else on the panel want to talk about that? We have another question here then.

Q Yes, Mr. President. If it were entirely up to you and a decision had to be made today, what would you do? (Laughter.)

THE PRESIDENT: If I answered that question today, it would make it less likely the decision would be made. That's the truth. (Applause.) And I'm not dodging this. I honestly don't know what I would do today, because I have -- and I've spent hours and hours just getting ready for this meeting, trying to master the details of the various plans that the people at this table have proposed.

I don't know what I would do. But I am open to the idea that if we can get a higher rate of return in some fashion than we have been getting in the past, while being fair to everybody, and guaranteeing that we'll still be lifting the same percentage of people out of poverty, we ought to be open to those options. Because I think that's better than raising the payroll tax a lot more -- because it's a regressive tax and, for example, more and more people work for small business, and if you're a small businessperson you've got to pay a payroll tax whether you make any money or not -- 70 percent of the people pay more payroll tax than they do income tax today, working people. I hate to do that.

I don't want to cut benefits substantially because most people have something besides Social Security, but Social Security alone lifts half our seniors out of poverty -- 48 percent, literally. And we've got the smallest government we've had in 35 years, and I don't want to close down the National Park Service or stop supporting education or stop running our environmental protection programs. And we've cut the national defense about all we can, given our present responsibilities in the world and our need to modernize it.

So the reason I'm here with you is I think all these people deserve to be heard, because if there's any way we can get a higher rate of return in a market economy, while minimizing the risk, whether it's in either one of these approaches, we ought to go for it, because the other alternatives are much less pleasant already. And if we wait around for five or 10 years, they're going to get a whole lot worse than they are today. (Applause.)

Q At some point I just wondered if we could have -- maybe some of the experts who are in favor of going to the privatized system answer the concern which I know others have expressed about what is going to happen to the insurance part of Social Security, what's going to happen to the benefits for the disabled, what's going to happen to the survivors. Is it the intent of people who want to set up the private accounts and privatize to maintain those other elements of what we today see as Social Security, or would they be whittled away, as some people have feared?

PROFESSOR BOSKIN: I don't think people should fear that at all. All of the serious proposals maintain those parts of the system and they are not privatization, per se, they're taking a portion, and generally a modest portion, of the current defined benefit payroll tax and moving it to establish individual accounts, or, Senator Domenici talked about another plan using refundable credits from the general revenues and the surplus to start to establish them. So I think that you really needn't worry about that in general for most of the plans that people are talking about.

I think it's very instructive to look at the last time we went through this as a nation -- which was in the early 1980s, that led up to the 1983 Social Security reforms. We established a commission appointed by the President and the leaders of Congress, and many members of both parties and both Houses were on it. And they came up with a variety of things and were hailed as having solved the problem. There were many good things about what they did. It was supposed to build a surplus that would eventually get to $21 trillion and solve this until about the last 30 years of the next century. Within a few years -- I was writing a book and it became obvious that we had solved only one-sixth of the long-term problem.

If at that time we had established a modest individual account plan where people could have invested -- now, yes, it's been a tremendous bull market since then, almost exactly coinciding, but like Senator Domenici, I don't want to count on that -- let's look at long-run averages -- our problem today would be much smaller. People would have a sense of ownership. We'd have a much better Social Security and private retirement system. (Applause.)

REPRESENTATIVE KOLBE: May I just add that the National Commission on Retirement Policy that I co-chaired, our proposal does not touch the disability or the survivors. We recognize that the disability is an issue that clearly has to be looked at and there has to be some reforms, but we keep it intact. It's exactly as is. We only take two percent -- two percent -- of the 12.4 percent now in payroll tax to put into this new personal account.

It seems to me a fairly modest amount to put aside so that young people will have an opportunity to save, that they can put something for their own retirement, while at the same time, we're making sure that people now on retirement, on Social Security, get it, and those who are the baby boomers will get it, as well.

MR. DIAMOND: Senator Kolbe, could I ask you about this? I've read what I could find on this proposal, and I know all the details aren't worked out, and they're to be worked out. And I understand you're preserving the disability program by having the same relation to the benefit formula as there is currently. Is that correct?

REPRESENTATIVE KOLBE: As it is now, yes.

MR. DIAMOND: And the benefit formula, though, is cut two percent a year, year after year, to free up the money that -- not the whole benefit formula, just the part on top -- is cut two percent a year, year after year, to free up the money to finance what's going in the individual accounts. That cut on the retirement benefits -- which makes sense, because people can accumulate up until retirement -- also implies the same cut on disability benefits. Now, the system can be changed, but there's an issue.

Q The question I have is on the disability part of the benefits. How much has that grown over the past 10 years, by the expansion of the definition of disability from physical disabilities, to psychological disabilities, that in the past, have been defined as behavioral problems?

SENATOR DOMENICI: I don't know the dollar amount. It's the fast growing part. But maybe somebody else who has worked on this knows an amount.

REPRESENTATIVE KOLBE: I don't, but I think there may be somebody that has those numbers. But it is -- it has been a very rapid increase, a quadrupling of the number of people on disability in the last, I think, 12, 15 years.

REPRESENTATIVE BECERRA: This is a general societal problem --

REPRESENTATIVE KOLBE: Yes, it's a general problem.

SENATOR DOMENICI: Well, I'd like to make two points. First, with response to the shell game, let me see if I can tell you how the transition money, from whatever source it is, why it is important and why it will not be shell.

First of all, the goal is to use this money to do better than we are doing. And if we don't do better, obviously, we've made a bad mistake. In other words, if you take all those resources you say should stay in Social Security and you leave them there, we're still $3.1 trillion short. And you're trying to use that transition money to make up for that $3.1 by using a piece of it to invest.

I would also say that one plan that I'm aware of does not take all of the proceeds of the individual account and give it to the individual. Portions of the proceeds go back into Social Security to make sure it is maintained and the commitment to the disability program and the other is maintained.

REPRESENTATIVE BECERRA: Mr. President, if I could just pick up on what the Senator said -- and I agree completely with what the Senator just said -- if those transitional dollars we get through these surpluses stay within Social Security, there's no shell game, because we can use the Social Security pot that's growing and growing to do something that we believe will give us a higher rate of return if we do it within Social Security.

But as soon as you pluck it out of Social Security and do something else with it, in, say, private accounts, then you have left the Social Security system with a deeper hole than the $3.8 trillion that we already estimate we'll have.

My concern is how we invest that money. If we do it within the Social Security pot and do it in ways that perhaps we take advantage of the higher return in equities, great. But I start to get concerned when we take it out of the pot of Social Security, which all of us agree is already way shy of what it needs to meet the needs of people in the future. (Applause.)

THE PRESIDENT: Can I ask a question here? I would like to ask the Social Security Commissioner or someone else here who's in the audience or with our staff to come up and give me the answer to the question the gentlemen asked about disability -- the exact answer. About a third of the people who draw Social Security checks are either dependents of people who were killed or disabled on the work force or disabled people themselves. So I want somebody to come bring me that information and how much it's grown and I'll give it to you precisely.

MS. WEAVER: Well, could I add something on that while we're waiting for that information, because one of the things we do know is that since the mid-1980s, the disability program has grown very rapidly and, in fact, Congress had to reallocate part of the Social Security tax to keep benefits going out on time in the disability program.

And the two areas of particular growth are benefit awards to people with mental impairments and among young people. And this raises a particular concern because young people with mental impairments have, under the program, relatively poor recovery prospects. We're finding people coming on younger and staying longer. So there are very serious problems that need to be dealt with in the disability program as well.

THE PRESIDENT: Commissioner Apfel just said that the number of people drawing disability has grown dramatically from more or less equally from two sources. One is the addition of mental impairments to physical ones. The other is the aging of the baby boom generation because the rate of disability increases as you approach age 50. So for people like from their late 40s until retirement age not drawing Social Security, there are significantly increased number of people because there are just more baby boomers in that age group now.

Q Currently the maximum annual income subject to Social Security tax is $68,400. Yet, benefits are paid to anyone, regardless of income from other sources. My question is how was the amount of $68.400 determined, and why not raise the ceiling for incomes subject to Social Security tax? (Applause.)

THE PRESIDENT: Let me say, first of all, the incomes of American people have grown to the point now that there is a larger percentage of people who get the benefit of the cap than there used to be. That is, a higher percentage of our people -- I forget what it is, maybe one of you know -- but most Americans are under the cap. That is, most Americans have income under the tax cap.

People at higher income levels pay higher tax rates on their Social Security incomes than people at lower income levels. And I think that's -- one of the reasons that the cap has not been raised at least a dramatic amount more is to avoid having it be an actual negative investment for the people involved, where you're just taxing people's payroll far more than they'll ever get back and they're just subsidizing the system. The way it is now, it happens a little bit, but not much. And people at higher incomes, once they start to draw that Social Security, do pay a higher rate of tax on it than people at lower incomes.

Michael, you wanted -- anybody else want to say anything?

PROFESSOR BOSKIN: The benefit formula that's financed by the tax is also very progressive, so people get back 90 percent of the first chunk of their average earnings, then 32 percent of the next. And the people you're talking about, whose cap you might want to remove, are only getting 15 percent back at the margin of their addition. So you have to think of both the tax side and the benefit side when you think about the fairness. You can't just look at the tax side itself.

DR. WEAVER: To her specific question, I just wanted to mention that the amount of wages subject to tax was increased quite substantially in legislation in 1977, and since that time has been indexed each year. So the amount of taxable wages goes up each year by the growth of average wages and the economy.

REPRESENTATIVE BECERRA: Mr. President, if I could just say, I think the question makes it perfectly clear how delicate a balancing act this all is. You raise the cap too much, and you start to make wealthier Americans feel like it's not a good investment for them and look for ways to get out of it completely. You keep it too low, and you don't bring enough money in.

The ultimate solution will be just -- just a group of all sorts of different elements in it. It will include various things -- maybe this is well, raising of the cap. But you have to remember that ultimately, you want all Americans to still feel very good about Social Security, and you have to figure out a way to make sure that all Americans say, that's what I want to do.

SENATOR KOLBE: It's worth noting that in 1935, only $3,000, when it was created, was subject to -- $3,000 of income was subject to the Social Security tax. So today, it's $68,400. It's been raised, I think, 21 times. And the rate was one percent.

SENATOR DOMENICI: I think one answer, very specifically and precisely, is that the people in the higher income brackets get back much less of the money they earn than those in the lower brackets. The form is a reverse form so that in the lower portions, lower income, get back much more; the higher incomes, much less -- and if you went much higher, they would be getting nothing back before the money they put in Social Security. And I think what Xavier is saying is that's a large group of Americans who would be asking the same kind of question everybody is -- what do we get out of this.

MS. BORGER: Mr. President, we only have a few minutes left in this forum, and I just wanted to give you the opportunity to give us your final thoughts about what's occurred here today and what's coming in the future.

THE PRESIDENT: Well, I'd like to go back to the question the gentleman asked me when he said, if this were up to you, and you had to decide today, what would you do if you were all by yourself -- there may come a time when I wish that by yourself. There may come a time when I wish -- when we have so many headaches working this out, I wish it were just my decision to make, all by myself.

I think it's important for me and for the others in the Congress who care about this to maintain -- but especially for the President -- to maintain an open mind as much as possible now, because I don't want a particular proposal just because it's been endorsed by me to have to be supported or opposed by other people because of their political position. I'm doing my best to keep this a matter of people and progress over partisan politics.

But I also want to make it clear to you that I honestly, myself, have not made up my mind exactly what I think we ought to do on this because, as you can hear from this debate, there are arguments on both sides of all proposals and it's a rather complicated matter.

I can tell you this: I want a guaranteed benefit. I want it to be fair and progressive and universal. I want to have the best earnings we possibly can within that framework. And I don't want to come to a point down the road where we have to wreck the financial responsibility we worked so hard to bring into this country to give us our present prosperity to pay for the retirement of my generation because we didn't have the responsibility to take action now, when we should.

And I think if we can stay with these general principles and continue to learn and explore all these debates and learn as much as we can from the experiences of other countries -- we didn't have a chance to get into this today, but you all laughed when I was kidding Mr. Reischauer about the popular skepticism of government making these investments. But Canada is starting to do it, and we'll have a chance to watch them and see how they do it and see how they deal with some of the objections that have been raised.

So I think that what I would urge you to do is to continue to learn about this. If you know what you think, make your voices heard. And support your senators and your congressmen in saying that we have to act on this and we have to do it next year, because we can't afford to wait. We're taking this year, studying, raising public awareness, presenting all the alternatives to people. By next year we'll be ready to act and we should do it.

And if we have the support of the people in this room, that vary across age and income groups and all kinds of other ways, then we'll be able to do what's right for America because we will be doing the work of democracy.

Thank you very much. (Applause.)

MS. BORGER: Thank you Mr. President. I'd like to thank all the panel members, as well, for participating in this national forum on Social Security. Have a good day.

I'd also like to thank the city of Albuquerque for being such wonderful hosts and asking such great questions. Thank you very much. (Applause.)

END 1:45 P.M. MDT