Meet the Street: How to Fix Social Security

Would Americans be better off if we called the shots on how to invest our own Social Security funds?

Wade Dokken CEO, American Skandia

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The experience of many former Enron employees might suggest otherwise, but the Social Security system is in serious trouble and legislators are considering all possible options to fix it. Among the proposals is a plan supported by President Bush to let taxpayers invest some of their own Social Security contributions in the stock market, in hopes of boosting retirement savings down the road.

We talked to Wade Dokken, CEO of financial services company American Skandia, about the possible benefits of reforms. In an upcoming book, New Century, New Deal: How to Turn Your Wages Into Wealth Through Social Security Choice, Dokken advocates letting taxpayers invest part of their Social Security taxes in personal accounts whose funds would be available only to them.

TSC: Why do we need to make changes in the current system?

Dokken: The problem with Social Security is this: When you read the original testimony, when the program was founded, the people at the time knew that eventually actuarial realities were going to catch up to the program. What bailed everybody out was the baby boom generation, which created this huge increase in population that for the last 40 years has been net payers into the Social Security plan. It's that net paying-in that has allowed us to increase benefits so consistently during the plan.

Now the worm has turned. We are on the cusp of having a significant increase in the number of people who will be recipients. And their life expectancy is fundamentally longer than anybody anticipated, so Social Security as you know it and I know it is financially unsupportable.

We would have to do one of two things to [maintain the status quo]. One is increase the payroll taxes by approximately 50%, according to several congressional studies and different commissions that have looked at this. Or we could reduce benefits by about 33%. That primarily means extending when the retirement age is when you can begin fully receiving benefits.

The most important thing we have to do now is have a funded program. We don't allow corporations to have unfunded programs today for their pension plans. "Funded" means that for each year you participate in the workforce, if somebody's going to guarantee you a future income, they have to put money [into an account for you] each year.

Social Security does not do that; it's a pay-as-you-go system. The money you put in today has absolutely nothing to do with your retirement. It's merely a pass-through to people who are retiring today. There is no savings account with your name on it. Social Security is an unfunded program, and unfunded programs are subject to political manipulation.

TSC: Specifically, how might it work to let people invest some of their Social Security money?

Dokken: I think at the maximum, of the 12.4% of our income we all pay in [to Social Security], not more than 8% could be put in private accounts, and the other 4.4% would be part of the income redistribution part of Social Security. So the maximum I might be able to put in a private account is [8% of my income]. I think, realistically, it wouldn't even get that high. You might have somewhere between 4% to 6% you would be able to opt out.

TSC: As the head of a financial services company, you have a vested interest there. Obviously, you would benefit if more taxpayers have the choice to invest some of their Social Security money. You'd collectively be making a lot of money off fees and commissions.

Dokken: I would be incredibly happy if the public policy that develops would just embrace the current [retirement] system used by the federal government for its employees, their version of the 401(k). You can take that model and apply it to this, and you can take every private company like mine right out of the picture.

I think the cheapest fund [available to federal employees] costs about 8 basis points [a year]. The funds are all passively managed. There are a total of about five or six funds to choose from.

The [federal government] has an incredibly cheap program, and so you've dramatically increased performance for the investors.

TSC: Given concerns about people's ability to manage their retirement accounts, in light of problems at places like Enron, isn't it more difficult to lobby for this idea now?

Dokken: I think the demagogues win in the short term. They'll say Enron's the justification for not doing it. They'll say the stock market decline is justification for not doing it.

But in giving reasons why we shouldn't do it, nobody is saying what is going to be the financial viability of Social Security in 10 years. How are we going to pay for the promises we have already made? If we are going to pay for the promises already made, how are we going to cut [benefits]? And why not cut them now, so we can allow people to plan for it?

The problem is not today, but 10, 15, 25 years from now. If we don't deal with it today, there isn't a viable solution.