TCS Daily

Wade Into Social Security Privatization: A TCS Interview

By Wade Dokken - December 3, 2001 12:00 AM

Editor's Note: "By creating private accounts, you'd create private assets and private assets could be passed onto another generation as capital. And I think that would change the lives of millions of people," says Wade Dokken.

And Wade would know. A former advisor to Hillary Clinton, he is the President and Chief Executive Officer American Skandia, Inc. a financial services companies in the country, with more than $30 billion in client assets under management.

Wade recently sat down with TCS host James Glassman to discuss the coming social security crisis and what to do about it. As the Presidential Commission on Social Security Reform gets ready to present its recommendations this month, Wade's views are especially important.

TCS: Wade Dokken, you have written a book about Social Security, what 's the title?

Wade Dokken: "New Century, New Deal, How to Turn Your Wages into Wealth through Social Security Choice."

TCS: You know, so many people who write about this subject are policy wonks like me. How did you get involved in it?

Wade Dokken: Well, that's a great question. I have always loved public policy but this was more motivated by a series of things, I would say three or four things. One is my love of public policy, my access to information about how out of line our Social Security system is and what we can do about it, and the fact that I, like a lot of people, am a parent and I have three boys for whom I know the Social Security system is not going to deliver.

TCS: Now, what would you like to see as far as reform for Social Security is concerned, just briefly.

Wade Dokken: Well, the most important thing we need to do is we need to have a funded versus an un-funded system. We need to be honest about putting aside money now for the retirement of people at a future date. Today we're not doing that.

Once we've established a funded system, I believe we need to invest it in what I call a modern way, so that those assets that are set aside are being invested as any modern portfolio manager would invest assets, whether that's like the state of California or the state of New Jersey or anybody's 401K.

TCS: When you say a "funded system," I think this is worth spending some time on. How does the current Social Security system work and how is it similar or not similar to a conventional pension plan?

Wade Dokken: Well it's not similar to any other pension plan because the law of the land of the United States is that you can't have pension plans like Social Security. Social Security does not have any assets set aside for anybody's retirement. It's a pay-as-you-go system. You and I as under 62 or under 65-year-old taxpayers pay money in, and people who are now receiving Social Security receive that money within 30 days. It's a conduit system. What we pay in, somebody else receives. Therefore it is dependent upon, when I retire, another generation of people to be doing the same thing.

The problem is -- and it is the crisis question -- the demographics of this nation have changed profoundly in two ways. One, longevity has increased tremendously so we have an ever-increasing percentage of our population that is over age 62, 65. And all those subgroups are the largest growing groups of our population.

The second part is our birth rates are way down. So not only are we living longer but the replacement population is smaller. When Social Security was created we had 43 people supporting every retired person. Today we have 3.1 and in a very short matter of years we'll have two people supporting every retired person. It won't work.

TCS: And so your solution is to allow individuals to invest part of what they now pay in payroll taxes in private accounts in stocks and bonds, is that correct?

Wade Dokken: That's correct. That's the third part. I said number one: a funded system. Number two: invest in a modern way. And the third conclusion, I believe, is to allow people to at least have the option of having their money invested in private accounts.

TCS: And exactly how would that work? Would people be free to put their money just about anywhere, the way they do now with 401Ks? The 401K plan, of course, is limited by the offerings of the employer. But there are hundreds, probably thousands of choices, is that the way this would work?

Wade Dokken: I doubt it. It's not what I would recommend. Social Security is the foundation retirement plan for all Americans. And as such, if that money is squandered in any way, you would have a social crisis. So I think what would happen is there would be some significant limitations.

I believe a recommendation would be to let people invest in bank CDs which are guaranteed and are very safe and have a rate of return that is far in excess of Social Security's rate of return today.

It is also possible that you allow people to stay invested in a Social Security system and that all the money is held in a pooled account and managed like any other state pension system.

A third option is to allow people to have a limited number of choices and those choices would probably be automatic portfolios that have a combination of stocks, bonds, and cash so the risk would be very low.

TCS: Now when you said your second option, which is pooled accounts, are you saying that you think that it would be a good idea if, let's say, government employees or a government-run board were to make investment decisions for Americans? That is what, I guess, Alan Greenspan has been alarmed about, the notion of the government itself becoming a large shareholder in American corporations.

Wade Dokken: I think it's a possible outcome, but it's not one that I support. The reason I don't support it is I believe the politicization of it would be too great. For example, if the government owned the stocks, who would vote the shares of those stocks? I think that's a problem. I think quickly it would be politicized another way, in which the government would set up laws that we can't invest in certain types of stocks.

So it's not a proposal that I personally support, but I think it is a proposal that is supported by almost half the people in Congress.

TCS: But you don't think, in general, that people should have a wide range of choices. Another model might be the thrift savings plan, which is kind of the federal equivalent of a 401K plan.

Wade Dokken: I think that's a very good model. It has five choices. It's a great model because there are limited choices, they're indexed funds, and there are very low fees.

Currently there is a way to save for college education which is known by a lot of people, it's called a 529 plan, and what occurs in 529 plans is, you get those five choices. But there are combinations of stocks and bonds already established. So, for instance, as you're younger, you'll have a higher percent in stocks. And as you get older and you have less time to take risk, [the plan] would automatically [move savings] to a lower [risk of investment]. And I think some kind of structure like that would ultimately be the best thing to do.

TCS: Now let me get this straight. Is a reform of this nature intended to save Social Security in a financial sense? Or is it to provide Americans with a way to own their own retirement plan and have more money when they retire?

Wade Dokken: Well, I would argue that it's both. Social Security is a bankrupt system. At one point, we can model that it will be $27 trillion in deficit in about 30 years. So there's no financial scenario except for a growth rate for the U.S. economy sustained over decades that we've never achieved that will bail it out.

Having said that, one of the things that is important to realize is that the kind of implicit rate of return for Social Security today, for people under 50, is approximately zero. And it gets negative as you get younger. Compare that to the worst 50-year period for the stock market, which is plus 4 percent.

So we can save Social Security and at the same time create an income stream for people retiring which is greater than Social Security.

TCS: Now some people say this is not a good time to bring up the idea of reform that involves any kind of stock market investing. Isn't it risky for Americans to have their retirement dollars tied up in the stock market?

Wade Dokken: Well the risky scheme would be to do nothing. I can guarantee you that people will lose money on Social Security if we do nothing. So if guaranteed loss of your investment principle is safety, then we have the safest system we can create.

Having said that, there's no level of analysis that does not tell you that owning a basket of stocks and bonds over a long period of time is going to produce superior returns. And the risk is focusing on the very short period of time, or the risk is having an insufficiently diversified portfolio, both of which would be solved by using indexed funds and having long-term, pooled accounts.

TCS: So the point is that over a long period of time, if you have a diversified account, the riskiness of stocks is....

Wade Dokken: Negligible.

TCS: Certainly no greater than bonds, as many economists have found.

Wade Dokken: Well bonds are riskier than stocks. Risk is two things. Risk is short-term volatility [and] bonds can have short-term volatility just like stocks can. But risk is also opportunity foregone. And when you look at the average rate of return for a basket of stocks over a 50-year period, it is nearly seven percent after inflation. It's almost nine, ten percent before inflation. And Social Security is, today, for the entire population, at 1.7 percent. And for the younger population it's a negative number. It's difficult for me to see the risk in diversified equity portfolios.

TCS: Now your own firm, American Skandia, is in the annuity business. I think people would be wondering whether your book might be self-interested. Are there ways that you can gain as a result of this reform?

Wade Dokken: Well it depends on what the reform is. My reform has been careful on that. I'm thrilled if the outcome is 100 percent of the assets go into the thrift savings plan, in which companies like American Skandia do not participate.

I do believe that the economy -- and therefore all of our boats -- will rise if Americans are actually converting Social Security to a savings program. The pool of investment capital available will almost, undoubtedly, mean that we'll have sustained, longer, and higher growth rates.

TCS: Just as a last question since we focus on technology on our website, Tech Central Station. What would be the effect on technology companies as a result of a reform like this?

Wade Dokken: I'm not a futurist, but I would give you one small example. There's no predicted reform that will not focus on the administrative costs of the accounts. And the only way to solve the administrative costs will be to have everybody able to avoid talking to people on the telephone but build their access to accounts and model things right on the Internet.

But this is a powerful application, because if you now have 280 million people, all with the same need to access data on the Internet that involves their money, I think what will flow from that will be a much greater sophistication in Internet banking, Internet investing, and Internet shopping.

TCS: As well as providing capital for Internet companies.

Wade Dokken: As well as providing capital for them, yes.

TCS: Wade, some people might be surprised to find out your party affiliation and that you've been fairly active politically. Tell us just about your politics?

Wade Dokken: Well, I'm standing in my office looking at a picture of myself and a picture of Senator Hillary Clinton, so you can get some ideas on it. I'm a Democrat and I'm a liberal. I'm a socially tolerant liberal and a fiscal conservative, and I see nothing that I've said which is in conflict with that.

If you create pools of capital where the guy today -- who might be a laborer or anybody today who might be of the underclass -- could have a pool of capital of $250,000 or $500,000 of their own wealth, I think that's the greatest social program you could create.

TCS: I mean in a sense, of course, wealthier Americans already have pension plans that are oriented around stocks and bonds, and less well-off people don't have those things and really don't own their own retirement accounts, is that correct?

Wade Dokken: That is correct. And in fact, what people forget is the class of people most damaged by Social Security today: single, black men. And the reason is that they often are poor, and poverty creates lower mortality rates, and lower mortality rates mean that which they paid in they don't ultimately receive. By creating private accounts, you'd create private assets and private assets could be passed onto another generation as capital. And I think that would change the lives of millions of people.

TCS: Well, thank you, Wade Dokken, this was a good note to end on.

Wade Dokken: It was my pleasure, thank you.

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