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Life Cycle Funds May Star In Privatization Debate

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Bush administration officials have sketched out proposals for putting some Social Security assets in privately managed accounts.[@@]

One option would encourage workers to put the first $5,000 of assets in a handful of carefully selected investment funds, according to published reports. The default option would be professionally managed “life cycle” funds, or funds designed for workers with specific retirement dates.

Managers of life cycle funds increase the percentage of bonds and other fixed investments in the funds as the targeted investors age.

The Bush administration also is looking into the possibility of expanding the menu of investment choices for workers with at least $5,000 in their personal Social Security accounts.

Democratic senators attacked the proposal today at a hearing organized by the Senate Democratic Policy Committee.

Many Senate Democrats questioned whether the Social Security program faces a serious crisis.

Sen. Mark Dayton, D-Minn., noted that the Social Security trust fund managers have come up with a mid-range economic scenario that assumes the U.S. economy will grow only half as quickly as it has been growing in the past few decades. The trust fund managers’ optimistic scenario assumes the U.S. economy will continue to grow about as fast as it has been growing, Dayton said.

If the long-term U.S. economic growth rate really falls 50%, the Treasury securities already in the Social Security portfolio might outperform portfolios of private stocks and bonds, Dayton said.

If the economy continues to grow about as quickly as it has been growing, then Social Security could end up with a surplus, Dayton said.

But Michael Tanner, a representative for the CATO Institute, Washington, a libertarian think tank, pointed out that the Democratic Clinton administration warned in the 1990s that the Social Security program faced a potential demographic crisis as a result of the aging of the baby boomers.

Tanner said Congress could strengthen Social Security by approving a proposal to link increases in Social Security benefits to inflation, rather than to wages, which tend to rise somewhat more quickly than inflation.

Many Democrats have attacked the proposed index change, arguing it would lead to huge reductions in benefits in coming decades. But the index change would have a huge effect on Social Security program solvency and little effect on current retirees and older workers, and even younger workers would continue to see their benefits increase with the rate of inflation, Tanner said.

“Only in Washington is the reduction in the rate of increase considered a cut,” Tanner said.

Congress could compensate for the effects of an index change on younger workers by letting younger workers try to use private Social Security accounts to boost their Social Security benefits, Tanner said.


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