The pension bill that was passed by Congress recently had a provision in it that allows employers to create savings plans with an opt-out provision. That is, an employee is put into the savings plan unless they explicitly request to be let off.

     There's a lot of research which suggests that that opt-out type approach, that most people will stay in the saving plan, and you get very significantly effects that way...

      One, one might consider, I suppose, using the existing Social Security system. There was a big debate here in Congress, of course, about so-called carve-out accounts, et cetera. Something that might be less controversial possibly would be an add-on account, whereby individuals had a chance through their payroll saving -- through their payroll taxes to contribute to an independent account that would be in their name.

In the Q&A session

In my view, a retirement system with a significant personal accounts component would provide a more credible means of ensuring that the program actually adds to overall saving and, in turn, boosts the nation's capital stock. The reason is that money allocated to the personal accounts would no longer be available to fund other government activities and--barring an offsetting reduction in private saving outside the new accounts--would, in effect, be reserved for future consumption needs.

Other types of Social Security reform seem less promising from a national saving point of view. If, for example, the individual accounts were to be "carved out" of present payroll tax payments, as President Bush has recently proposed, household saving would go up but government saving, in the first instance, would go down by the same amount, meaning that the initial impact on overall national saving would be nil.

Given the low national saving rates, and the fact that many American households do not save enough to avoid a big cut in their standard of living in retirement, it would seem desirable to have Social Security reforms that also raise national saving. One obvious and immediate way to do that would be to raise payroll taxes; another obvious, and perhaps less painful, way to do that would be to have individual accounts on top of Social Security

The advantage of moving toward increased use of personal accounts in government pension systems is that it would reduce the taxes imposed on one generation to fund the benefits paid to an older generation...A move toward personal accounts would strengthen the links between one’s contributions and the benefits he or she receives, and thereby lessen the burden of an aging population on the funding of retirement benefits.

Personal accounts will allow people to insulate themselves from the risks inherent in a system that relies on taxing one generation to fund the benefits of another generation.

I think the idea of private accounts are a fascinating possibility that hopefully will get lots of discussion.

One of the reasons that I think we have to move towards a private individual account system is they, by their nature, tend to be significantly fully funded, even if they are defined contribution plans, because individuals know what they need for the future, and they tend to put monies away adequately to create incomes they will need in retirement.

There are basically two models that we're confronting. One is the pay-as-you-go model, which if we can fully fund, will work. But it's shown very considerable difficulty in doing that. The other is the forced savings model, which in the current context is not increasing savings because you're switching from the federal government to a forced savings account. But as a general model, it has in it the seeds of developing full funding by its very nature, and therefore, I've always supported moves to full funding in the context of a private account.

If you're going to move to private accounts, which I approve of, I think you have to do it in a cautious, gradual way and recognize that there is yet another problem involved, which is this. Unlike almost all of the other programs with which we deal, moving to a forced savings account technically does not materially affect net national savings. It merely moves savings from the government account to a private account.

My own judgment is I think when you have assets which you own which you can bequeath to your children and which have your name on it, I think that is a highly thing [sic] because you give wealth basically to people in the lower and middle income groups who have not had it before. Because remember these private accounts, even though they are a forced savings, are, indeed, owned by the people and they have wealth which they probably would not have had before.

Ordinarily, any increase in spending or reduction in taxes which are funded by marketable securities clearly increases the deficit and lowers national savings. The only reason I raise it at the moment is that we are discussing these private accounts, and this is one of the very rare cases in which you can increase the deficit but not - but not decrease the national savings if you have the forced savings accounts which I mentioned earlier.