ROBERT REISCHAUER, Urban Institute: Let me take advantage of this unaccustomed silence to begin the proceedings. I'm Bob Reischauer, the president of the Urban Institute. And let me welcome you all to this First Tuesday forum, which is focused on opportunity, assets, and ownership and evolution of the policy agenda. We hold First Tuesday gatherings once a month to discuss topics that are of interest to the policy community in Washington, D.C., and topics that we have some expertise on and have attempted to contribute to the dialogue. Today we have a very distinguished and knowledgeable panel, who will speak briefly to you, and then we will, of course, entertain questions and a broader discussion.
In order of their contributions, we have first Bob Lerman, who is a senior fellow here at the Urban Institute and for eight years was the director of the Labor and Social Policy Center here at the Institute. Bob is an economist who is also on the faculty of American University and has taught at Brandeis and the University of Pittsburgh and other places as well as serving on the staff of a Hill committee.
Following Bob will be Harvey Rosen, who is celebrating his one-week anniversary as the chairman of the president's Council of Economic Advisors on which he has served for about a year and a half, I believe. But in real life, Harvey is a professor of economics at Princeton, where he has been for the better part of three decades, contributing to the public finance literature with a short sojourn in the late '80s and early '90s to be the deputy assistant secretary of Treasury for tax
policy.
We will skip the next individual and go to Lisa Mensah, who is executive director of the Initiative on Financial Security at the Aspen Institute. She is a expert in financial tools and began her career actually in commercial banking for Citibank and then moved to the Ford Foundation for 13 years, where she was the deputy director of economic development and was instrumental in the program at the foundation dealing with individual development accounts, which spread throughout this country and also abroad.
Following Lisa's contribution, we will hear from Ned Gramlich, who is a member of the Federal Reserve Board and who has been in that capacity for the last seven years. Before that, he was the
dean of the public policy school at the University of Michigan and a professor of economics and public policy for several decades. Ned has a lot of experience in Washington. He was the deputy director and acting director of the Congressional Budget Office, the director of policy research at the Office of Economic Opportunity. He was the chair of the quadrennial Social Security commission and has served in other capacities such as senior fellow at the Brookings Institution.
Last but not least is Jodie Allen, who is a senior editor at the Pew Research Center, was the managing editor until quite recently for money and business at U.S. News & World Report, has had a distinguished analytical and journalistic career as the bureau chief for Slate magazine here in Washington and also as the editor of The Washington Post's Outlook section for a number of years. What she tried to hide from her resume is the fact that she was also an analyst at the Urban Institute, and that's when all the good things began to happen to her. (Laughter.) So without further ado, let me turn it over to you, Jodie.
JODIE ALLEN, Pew Research Center: Thank you, Bob. Well, you all know what our topic is today. I think it's interesting that Bob harks back to my time at the Urban Institute because it was then back in the early '70s that the issue of opportunity versus what we now call adequacy. I don't think we framed it so much in those terms then, but we did begin to talk about incentives. Some of us who had been working on the Family Assistance Plan, the Nixon welfare reform, a few of us became interested in the idea that one really had to worry about the tradeoff between adequacy and preserving incentives, and the fact is that —Gene Steuerle, whom I see here in the audience, put it so nicely in a recent paper—that adequacy policy often reduces opportunity among the very classes it pretends to serve. He says, "This is a basic fact of life that those of us who consider ourselves somewhat progressive have often failed to admit."
But, of course, there is another side to that coin, and I see the very same Eugene Steuerle quoted yesterday in the Wall Street Journal, which had, many of you may have noticed, a very interesting article on the ownership society. And the Journal points to another recent analysis by Gene, which takes as its title "An Ownership Society or a Society for Those Who Already Own?" And there is no question when you look at the data, especially the results of things like the very popular notion of tax credits or, for example, incentives for investment, that you will find—and all the data show that while they are usually pretty ineffectual in encouraging additional investment, they usually have the effect of encouraging higher-income people who already have investments to switch those investments to a tax-preferred status. And so they can only too easily turn into simple tax breaks for people who are already well off. So it's a definite trade-off there, and I think we'll be discussing that today as well as the question of risk. As
you move away from assurances of adequacy to a tendency to encourage ownership, naturally you open up the possibility of risk. And as the Wall Street Journal also notes, not many people are as lucky as our president who, when he, as it says, was able to have his own financial risks and business failures cushioned by investors drawn from his family circle. So about everybody is
equally up for risk.
I will just briefly mention that at Pew we have been looking at these issues in a variety of our surveys. We find that Americans as a group—and this is true across parties—are much more up for risk than their European counterparts. Even blue state Americans are not Europeans in disguise. We are much less wed to the notion that the government should be there to cover all contingencies. On the other hand, in the latest poll, which we will release tomorrow night or Friday, in which we're looking at responses to the Social Security Act, we are rather surprised to find that support for the president's Social Security proposals has actually fallen fairly considerably to less than a majority over the last few months. And moreover, we find that those who are most familiar with the proposal—and one factor in that increase in disapproval is that more and more people have become familiar with the proposal. And the more you know about it, the less you seem to support it. And this is true across both parties, although, of course, Republicans are much more likely to support the president's proposal—although not a whole lot more supportive of his handling of the issue. You know, it'll be up to analysts to try to explain this, but one thing that is very clear in our poll is that there is extraordinary support across both parties—80 percent—for Social Security per se, that while people are interested in the
idea of having more control and so on, the overwhelming feeling is that there are some sort of safety nets that the society should invest in. Social Security appears to be one. Yes, we should put it on a solid financial footing, but this seems to be one area in which we are less prone to risk taking than perhaps in others.
So I will stop there and turn to my former colleague. Almost everyone in the city has worked with or for me at some point. Bob, I will just mention, was one of those who, in the '70s, shared
my view that more incentives for welfare recipients, more emphasis on job approaches was a good idea. We worked together in the Carter administration, and while we didn't win that argument, we at least kept the other side from winning. Bob.
ROBERT LERMAN, Urban Institute: (Laughs.) Thanks a lot, Jodie. Before presenting my substantive remarks, I do want to again thank Gene Steuerle—you hear his name a lot for good reason—for focusing our attention on this opportunity agenda. I also want to thank the Annie E. Casey Foundation for supporting some work that we've been doing here at the Institute on asset building. We've had several roundtables on a wide range of issues from housing, pensions, small business, even financial education and the role of asset tests in public benefit programs.
Now I only have a short time, and I just want to make a few points on two issues, first, on the pattern of asset and wealth holding among low- to moderate-income families as of 2002 and second, some lessons we can learn from policy analysis on income support programs as we go to assess these asset building and ownership type initiatives.
So first, on what are the patterns. I have a more detailed though not very detailed discussion of these patterns in the packet, and what you see of course is first of all, like most other economic patterns, there's a lot of variation. And there's a lot of variation even among low- and moderate-income families. So I want to highlight four points.
First, theoretically, it's important and appropriate to view asset holding and net worth from a lifecycle perspective. This is nothing new, but it's certainly not unusual or irresponsible to owe more than you own when you're young and investing in education and training. At the same time, you try to reach your maximum net worth before you retire, and then you start spending more than you earn. And if you look at the data, you see this pattern. For households with at least two people, the ratio of median net worth to median income rises very rapidly with age. It's less than a quarter of income for those under 35, and by the 55- to 64-year-old period, it's actually three times income. This is among all households with at least two people. And if we include Social Security wealth, which accumulates also over time, you'd magnify these differences substantially.
Second, while most families do in fact build up assets as they age and they do peak around retirement, families that have characteristics associated with low long-term incomes, especially low education and not being married, they tend to fall quite far behind. The gaps in net worth by education and family structure increase very rapidly with age, and they increase a lot faster than the income gaps, which we know also increase. Just to use a couple of data points, in their late 40s, the median net worth of households with at least two people and headed by a high school dropout was less than $11,000. Even by their early 60s, the median dropout had only accumulated $56,000. Again, this is non-Social-Security wealth and other government programs. Meanwhile, the median college graduate had accumulated net worth of almost $400,000 by his or her early 60s.
The third point is that even within the low-income and less educated population, there's wide variation in asset holding and net worth. For example, among married-couple families, even high school dropouts typically own their own homes. Their ownership rates are about 60 percent in their late 30s and early 40s, 72 percent in their late 40s, and by older ages, 80 percent; that is, as they retire, 84 percent or so own their own home. If you look at married couples with no college but at least a high school diploma, 77 percent are homeowners by their late 30s, early 40s; 91 percent by their late 50s. And these households—these high school grads—only have accumulated a net worth of about three times their income in the pre-retirement period. And if you look at inequality, for example, there's almost as much inequality among households with the same level of education as there is overall, regardless of education. So there's a lot of variation.
Fourth, only a modest share of families have debts that exceed assets. You would think that with bankruptcies running at 1.5 million per year that high debts might play a very large role in limiting the net worth of low-income families. But in fact, only about 12 percent of all households carry debt that exceeds their assets. Negative net worth is twice as common, not surprisingly, at younger ages, and only about 8 percent in the over 45 age group have debts that exceed their assets. So of course, even though the percent is relatively low, this does incorporate a lot of people. And we ought to be concerned about those people and what's going on with their families, especially as they stay in this situation in the older age ranges.
Okay now, I'm not going to go over the numbers in more detail, but instead I want to think about social policy initiatives. And as Gene has mentioned, this is not necessarily to abandon traditional income-based safety net programs but, as the society gets richer, to use the added social expenditures to promote home ownership as a way of moving more families into the middle class. And when we do this, we want to pay attention. How do we want to judge these programs? Now in my opinion, there is much we can draw upon from our experience with traditional benefit programs.
First—and this is maybe a little controversial—but in my view it makes sense to view policies that promote ownership as one end of a continuum that begins with income-tested,
welfare-like programs, then extends to social insurance, and then to explicit property rights through ownership. Income-tested programs are the most explicitly progressive with respect to current income, and they deal with current needs. But, as Jodie mentioned, they typically impose work, saving, marital disincentives. And they tend to pay people based on their inability to support themselves. I mean, that's the criteria. Often people must dispose of any assets they have accumulated to qualify for benefits. For these reasons, a relatively high share of eligible low-income families either do not participate in these income-tested programs or feel somewhat uncomfortable about participating.
Now social insurance programs like unemployment and Social Security provide benefits on the basis of risks that people experience, but also on the basis of having contributed to the program. And therefore people view these benefits more as a right and tend to participate in such programs, as they have kind of less stigma than the income-tested programs. Of course, they are not as automatically progressive with respect to current income, and they also are subject to rules that redistribute in very haphazard ways, subject to frequent congressional or state legislative changes in policies. They provide a kind of implicit right, but not an explicit, full property right.
And this is where ownership programs come in. They move all the way to the explicit property right area that cannot be abrogated by a legislative process. They more clearly link benefits to contributions than do social insurance programs. They involve no discomfort whatever about concerns about participation since people feel that the benefits that they are receiving are mainly a return on their contributions.
So anyway, I view this as a kind of continuum, and I want to just use one quick example in the case of unemployment. There, you could think of a menu of programs ranging from unemployment assistance, which would be income-tested, to the contributory unemployment insurance, and then finally to an unemployment insurance personal account that separately has been proposed by Marty Feldstein and Joe Stiglitz. How am I doing?
JODIE ALLEN, Pew Research Center: You're running out of time.
ROBERT LERMAN, Urban Institute: Oh, okay. Well basically, you have to look at these programs again through this lens, it seems to me, in terms of incentives, on the one hand, being best with the ownership programs, and on the other hand, progressivity being highest—at least explicit progressivity being highest—with the income-tested programs.
So though there are these benefits from the ownership approach, the question is, can we make such approaches progressive at least with respect to long-term economic status? Now, we don't take progressivity very seriously in one of the key areas that we promote ownership, and that is in housing. And as you'll see if you look at the graph in the packet, there is a kind of U-shaped curve in which benefits are available—some benefits are available for low-income families. They decline over the middle-income range and then increase substantially with income, so the benefits rise at higher incomes.
Do I have one minute?
JODIE ALLEN, Pew Research Center: Not really.
ROBERT LERMAN, Urban Institute: Oh, okay. Well, I was going to go through—maybe in the question time I'll go through the individual development accounts and how to take into account, again, the incentives and the equity issues that arise in things like individual development accounts. But I think that—you know, just to conclude—though we should take care in designing these asset-oriented programs, promoting assets is an attractive way to go. And we might think back to the fact that when the New Deal was passed, the idea was that the welfare-oriented programs would wither away with the maturing of social insurance programs. So welfare would wither with dependence allowance, and low income would wither away with unemployment insurance, and welfare for the elderly would wither away with Social Security. And it seems to me that if we're lucky and sensible, we might be able to promote ownership in ways that lessen our need for both these other kinds of welfare-oriented programs. Thanks.
JODIE ALLEN, Pew Research Center: Thanks, Bob. I'm sorry to cut you off, but we do have other panelists that have very interesting things to tell us. And we do want to leave as much time as we can for questions. And I'm sure everyone is very anxious to hear our next panelist, Dr. Rosen, who is going to tell us about how the concept of ownership pervades not just Social Security, where it has gotten the most attention, but the whole range of domestic programs—health, homeownership, education, and so on.
HARVEY ROSEN, Council of Economic Advisors: Thank you. I'm delighted to be here. As by now should be clear to everyone, the president has an ambitious agenda for his second term. Today I'd like to take the opportunity to talk to you about one part of that agenda: the ownership society. The Economic Report of the President, which we published two weeks ago, has a chapter that discussed the benefits of strong property rights and how they can be applied to many policy issues. I'd like to talk about some of the applications that we highlight in the chapter.
Beforehand, though, I'd like to briefly discuss the basic economics of property rights. Property rights facilitate the efficient use of resources. This is because an individual who owns an asset has an incentive to take into account both the costs and benefits of using it in various ways. Indeed, without clearly defined, transferable property rights, markets will either operate poorly or not at all. And without well-functioning markets, it's difficult for society to become prosperous. Research has shown a strong relationship between solid property rights and economic prosperity. Extending ownership and property rights can provide other benefits as well. Consider the example of homeownership, which, as the president notes, provides people with a stake in the neighborhood and a concern for its future. The results of recent academic research are consistent with this assessment. Homeowners, for example, are more likely to vote in local elections and to work to solve local problems. The president's policies have focused on dismantling barriers to homeownership. In December 2003, he signed into law the American Dream Down Payment Act, which helps low-income families with their down payment and closing costs. His housing agenda also includes increasing the supply of affordable homes through the Single-Family Affordable Housing Tax Credit, increasing support for self-help homeownership programs like Habitat for Humanity, simplifying the home-buying process, and increasing home-buying education.
Another important item on the president's ownership agenda is creating personal retirement accounts for Social Security. Under the president's proposal, contributing to an account would be completely voluntary. Doing so would provide workers with greater security and ownership over their retirement income. They would be able to manage their funds in their accounts in a prudent way, depending on their risk preferences and age. Personal accounts would also allow individuals to bequeath any remaining funds in their accounts to their heirs. In addition to strengthening the link between a worker's contributions and her eventual benefits, personal accounts would offer individuals the possibility of earning a higher rate of return than they receive under the current system. Accounts would offer workers flexibility to chose from different low-cost, broad-based investment funds and would allow participants periodically to adjust their investment allocation. Personal retirement accounts would be automatically invested in the lifecycle portfolio when workers reach age 47 unless they and their spouses specifically opted out and signed a waiver. Over time, the lifecycle fund would move them into more conservative investments. Personal account options and management would be similar to that of the federal employee retirement program known as the Thrift Savings Plan, TSP.
One of the main programs that President Bush has already put in place to expand the ownership society is health savings accounts. Signed into law in December 2003, HSAs are savings accounts owned by employees. Money in a worker's account can accumulate tax-free and can be invested, similar to an individual retirement account. Workers own the accounts and can take them from job to job or into retirement and even pass them on to heirs. These features, which extend from enhanced property rights, are important advantages of HSAs. In order to participate in an HSA, a worker must be covered by a high-deductible health insurance plan. HSAs have major potential benefits. They can reduce health care spending because, for amounts up to the deductible, people can front the actual costs of their health care coverage. By reducing health care costs, HSAs could lower the cost of insurance and increase the number of people with insurance.
Finally, I would like to turn to an intriguing idea for expanding property rights into the area of public education: school vouchers. Voucher programs expand property rights by providing families with additional control over resources—financial resources in this case. As we discussed in our economic report, families eligible for the vouchers are better off because they have better ability to select the school they prefer most. Further, a well-designed voucher program can make all students in a district better off, even those who do not participate in the program. How? If the availability of vouchers increases competition among schools for students, then schools have an incentive to provide a better education so that fewer students leave. Evidence from the Milwaukee school voucher program is consistent with the notion that all students do indeed benefit from a well-designed voucher program. A study of the voucher program found that the performance of students who use vouchers had risen several points in reading and math relative to where they would have been if they had remained in their local public schools. The students who remained in public schools also benefited significantly, as their test scores increased by several points over the students at comparison schools that were largely unaffected by vouchers. Vouchers are only one form of school choice. Additional forms include charter schools and plans that allow students to attend other public schools. When these programs are well designed, they too can produce efficiency gains by causing schools to compete with one another for students.
In short, the establishment of property rights increases economic efficiency. It is also a promising approach to dealing with a number of important policy issues. Thank you.
JODIE ALLEN, Pew Research Center: Now we turn to our next panelist, Lisa Mensah, who is distinguished by the fact that she has not only done research on the subject, she's actually had hands-on experience in innovative ways to promote individual savings.
LISA MENSAH, Aspen Institute: Thanks, Jodie. I'd like to begin also by thanking the Institute, Gene Steuerle, who serves on our board of advisors, and also in joining Bob in thanking Annie E. Casey Foundation, one of our supporters as well as the Ford Foundation. I think what's interesting about this topic is its popularity now, and I think it's owed to the president and to pushing this conversation on opportunity and assets and ownership. People like me have been on the assets topic, particularly for low-income people, for many years, but it's exciting to see it take such a prominent and center stage place. But what I'd like to suggest and what the Aspen Institute's Initiative on Financial Security focuses on is the solutions part of this. I think the president has a powerful message and I think we have much further to go on the solutions.
Let's take where our documents talk about homeownership. It's probably one of the most popular assets we could build and I was pleased to hear Dr. Rosen mention some of the president's initiative. We think that there is much further to go on this initiative, in terms of pushing the kinds of solutions which may allow more low-income people to participate. One of the solutions that I was able to support at the Ford Foundation—and I know the Annie E. Casey Foundation joined us as well—was one in individual development accounts—broad account-holding targeted at low-income people for a purpose like homeownership—essentially, matched savings—savings that is matched and targeted. This has today been on a very small and pilot level—about 20,000 accounts across the country. The question is how do we expand this, how do we make this more regularized, how does account-holding that is specifically targeted at low-income people that is matched, that is increased, get further out in our country? And I think that's a challenge.
I think what drives all of our interest in this topic is how alarming the statistics are—the great things that are so obvious in Bob's numbers here: the fact that account-holding is so modest for so much of the population, that really half of the workforce holds no additional pension, and that there had been no progress on that for 30 years. Those are alarming statistics. The fact that we have a zero savings rate—the fact that still, when we push our homeownership numbers, we've done great compared to European countries and others in general—close to 70 percent. But when we've parsed those numbers and we look down, homeownership rates and minority ownership are below 50 percent.
I think the work that we are doing pushes financial account solutions and pushes that as a place to start—to switch this ownership and to begin to change us from a country of those who already own to a country where ownership is broadly spread, to parse the quote here—is that we do need to look at account solutions and I think that is what is powerful about this moment now is that more account solutions are being put out there. And I think this is well beyond retirement, it's well beyond medical savings. We are looking at things like savings that begin at birth. These are ideas that I see the New America Foundation here, they've been a proponent of that. How can we look deeper—can we look as a country to begin matching and accelerating savings outside of the Social Security debate, right from the start of life? How do we increase asset-holding that starts early in the lifecycle so that you land at retirement in a better state? And I think this is the range of account solutions that deserve our attention as a country. When we have a discussion about policy evolving, that's a good place to start looking—the entire lifecycle.
I think what is impressive—it was great to hear the school voucher point in the session on opportunity—but I think the other side of that is, where do we start to increase funds so that
people can pursue higher education all through? We know that these charts vary so dramatically for wealth with higher education. And I think this is—we've got a 529 college savings policy that reaches many upper- and middle-income and higher households, but very little has been done to think about stretching that policy, matching it, pushing it down.
One of the questions that was in front of us today is, can we increase opportunity without abandoning adequacy? I'm a big believer that yes we can, that this is a country that believes both
in nets but also ladders, and that that is really the crux of so many of these opportunity policies: the idea that there can be more ladders, that we're not done when we help people achieve some level of adequacy. And the policy challenge begins—how do we really create these ladders of opportunities?
Now the problem that is often the question of the thinktanks and many of us in Washington is, how do we pay for this? What are the tax and budget implications? And I think here again we have an interesting chance to look at our priorities and to say not just pay or not pay, but what are we growing relative to other things? How is it that we can expand programs, like the Earned Income Tax Credit, to support new initiatives, to link those kinds of monies to savings? So I think that this question of how to increase opportunity, we should look at what is it possible to grow, to already expand? There are things that are already part of our landscape—401(k)s, savers' credits, things that exist already. And I think the challenge is, how do we expand? In the words of Michael Sherraden, one of the thinkers on asset creation, the challenge is an inclusiveness challenge. We
already, as a country, contribute much to build the assets and opportunity, and the question is, how do we spread this out, how do we make these kinds of policies work for more Americans? And I think that's the question about this trade-off between adequacy and opportunity.
I'd also like to address a very foundation-like, think-tank question, which is always about how will we know when we've succeeded? What's our success measure here? If we start shifting, if some policies are withering and others are waning, and opportunity in asset policy is something we'd like to see wax instead of wane and grow, how will we know when we've gotten there? What will our success measures have been? We've had years of looking at, did we get people over a poverty line? You know, did we meet basic nutritional and safety regulations? And again, I'm still for keeping the nets that obviously track that success.
I think though, that when we look at opportunity policy, things that build assets, there are a couple of things to look at. First, there are real things to count. If we think that there are solutions in the account world, if we think that accounts that help build opportunities for home ownership, that helped build new retirement opportunities, new opportunities for home ownership, we should be able to count what those accounts look like, how they build over time, who participates in them. I think there are some very obvious measures that we will be able to use. This is different. Another thing we can really look at, though, is major statistics. If we evolved in looking at the statistic of pension coverage and note that, for a long time, it's been stuck at the 50 percent or lower rate, there's something to look at. I think we ought to look directly there and say, have we made a dent? Are more people covered? Are we expanding the holdings of homeownership or pension—some of the biggest statistics we track?
But I think the deeper question, the tougher one, and for many of us is, even when we will be able to count new things, as we establish new policies, or track major statistics that should tell us, are we getting anywhere with things like pension coverage and homeownership? A hard question and one that I think deserves more attention is, who really are we reaching? And I think this is where there is some room to kind of stretch and push ourselves because I think that success here means to help those who are ready for the struggle, and I think that's okay. I think we should not
punish ourselves if we're making traction with people that are on the point of homeownership and we're helping them, instead of only measuring success only by looking at those who might have been in the lowest income bracket and rating ourselves as not successful at all—we didn't reach all of those. I think this is a place not to let the perfect be the enemy of the good or whatever the classic phrase is here.
But this is a harder area for many people because most of our former policies looked at those least able to help themselves and our success would be measured by how well we were doing here. So I think this is an area where we can look at segmentation—not all working poor Americans are the same and many will be able to participate in some new initiatives more than we expect. I think one of the surprises from the individual development account experience was our surprise that people earning at 50 percent of the poverty rate were able to save and accrue the same level as people at 200 percent of the poverty level. It made no sense to our starting position—how are those with actually less income able to save the same? And not that that was, you know, every person—but it did stun us. And one of the things that we concluded was that this match mattered so much—there was such a goal toward driving toward homeownership or some business capital, some of the key goals of an individual development account—that people's sacrifices increased and that families pulled together, that there were surprises here. So I would put out there to expand our notions of who are we reaching, to allow ourselves room along the income gaps. We've got a country that has some pretty alarming statistics of who is poised for opportunity and assets and ownership, and a big job ahead of us. So that's our work.
JODIE ALLEN, Pew Research Center: Thank you, Lisa. And now and finally, although certainly not least, we are also honored to have today, Governor Edward Gramlich of the Federal Reserve Board, who will put this all in perspective, and as a special bonus, he will tell us what the Fed is going to do with interest rates over the next decade. (Laughter.)
EDWARD GRAMLICH, Federal Reserve Board: That's a cheap laugh, Jodie. (Laughter.) There is a motherhood and apple pie aspect to ownership and I actually would join the others in congratulating the Urban Institute on having this seminar, because I think it is time that we sit down and talk in a serious way about ownership programs.
On the positive side, it is a way to encourage people to build wealth. It probably encourages them to save more, to take more responsibility for their neighborhood and things of that sort. Gene Steuerle's paper has been referred to often up here and it is a nice paper, in the sense that it gives a historical evolution of sorts that we happen to be at a century dividing line. So you can do this in a way that is a little over-simplified, but it sounds good, and that is the 20th-century
approach was focusing mainly on adequacy programs, bringing incomes up or Social Security, that kind of thing, and now it may be time to think about a new way of doing things and that is ownership. There is a limit to how far you can take adequacy programs. They are expensive because you want to have general coverage, and you can't cover everybody in the population, so you have to phase them out and that leads to the disincentives that many panel members have talked about. So there is a limit to adequacy, and if there is a next step, it probably is something about ownership. That's all on the positive side.
But everybody else has been four square for ownership, so let me just add a few cautionary notes. I think we have to accept and remember that ownership programs are a complement and they can't replace the adequacy programs. One point that Bob Lerman made in his look at the data was that there's a big variance. And there is a big variance; some people will take ownership possibilities and use them very well, others won't. And as a society, we can't turn our backs on those who don't just because they don't. And so, at best, we have something that can complement our adequacy programs but not replace them.
I want to talk about two specifics—one, drawn from my present life, I'm the governor in charge of low-income housing programs at the Fed, and one of the things that gets me into it is that I'm the chair of the Board of Neighborhood Reinvestment Corporation—have been for four years now. It's part of the president's homeownership initiative, Harvey—and we have done our bit and we have very impressive homeownership programs in many cities across the country. Overall, in the '90s, there has been a huge expansion in the sub-prime mortgage credit market, and this has been responsible for a rise in the aggregate homeownership rate from something like 64 percent to something like 69 percent. We're now one of the leading countries in the world in homeownership rates. We're actually not at the top, but we're getting close to the top. Something like 9 million new homeowners have been created in the past decade and that's all the good.
But there's some troubling statistics too. One is that in the sub-prime market, the foreclosure
rate—people who actually lose their houses, and in some sense, lose everything—is 7 percent. There are probably some people beyond that who, even though they don't lose their house, they are just one step ahead of that in some financial difficulties—(audio break). Now, if we have 9 million new homeowners, that does mean that something like 8 million of them are better
off. They're living in neighborhoods; they've got incentives to take care of their neighborhood. Other statistics are good, kids go to school, and that kind of thing, and that's great. But there are about a million of these new homeowners who have lost their houses, they've lost their net worth, and they're definitely worse off. And you can't ignore that, so it's fine to encourage these things but I think we can't care away the protections.
Now the other specific I'll mention comes from a previous activity of mine—I was chair of the Social Security Council ten years ago, and had a Social Security plan like 50 other people have done, and it did feature individual accounts. I thought—and it's become a little passé now—but I thought, at the time, that this was a good addition to Social Security and it would encourage saving, it would give people a chance at this higher rate of return—by the way, a chance at the higher rate of return and then also a chance at a lower rate of return. But I think there's a huge difference between individual accounts that are a complement to Social Security, known as add-on individual accounts, and individual accounts that are carved out of the present Social Security system, and I am quite nervous about carve-out individual accounts, as proposed by the president.
There are a huge number of social protections that are implicit in Social Security, social protections that we've had for sixty, seventy years, and we tend to take them for granted. But we have protection—we haven't had disability insurance for sixty or seventy years, but we have had it for forty years. There's early survivor protection, there is protection against outspending your assets, there's indexing protection against price inflation, there's protection against earning low incomes, and there's also protection—and this would become relevant if we got into the carve-out accounts—there is protection against people who don't save and invest well. And
given the variance we have in society, we're going to have some of those.
And so again, I think individual accounts are a fine idea. I would like to do it in my way, which would be as a complement to Social Security, not to replace Social Security, and it illustrates the general point, which is that ownership is great and probably will make very good sense for many of the people out there—maybe most of the people—but probably won't make good sense for all of the people out there, and as a humane society, we have to consider that as well. So we have safety nets and ladders and it's great to talk about ladders, but I want to keep the safety nets, too.
JODIE ALLEN, Pew Research Center: We are going to turn to questions now from the audience, although I am going to exert my prerogative to ask one. And it's what I think of as the time question. Time is something that you cannot pile up against the future, that you can't accumulate. And as I look at all these ownership options that are laid out on the table and those that are already there—the health savings accounts and the savings accounts for college education and so on—I wonder whether we will, all of us, be thrilled to find all these new options.
Not everyone was excited when Ma Bell broke up and they found themselves being called every night by long distance providers. I don't know how many of you have spent the time viewing your new opportunities to purchase your electricity from alternative suppliers, and I know, myself, when I've had to shop for health insurance or doctors or whatever, that it's an eye-crossing experience, as is looking for schools. I wonder whether we're paying enough attention to the time factor and its concomitant, of course, the complexity factor. It has been documented that most people don't even know what incentives the tax code now provides them. And if you doubt the complexity of looking at incentives and opportunities for financing college costs, my former employer, U.S. News, is about to put or has put out, a guide to paying for college, which believe me, since I top-edited it, will cross your eyes.
So should we not also be paying attention to this? And I know I'll ask Dr. Rosen to start and the other panelists to chip in.
HARVEY ROSEN, Council of Economic Advisors: Well, it's kind of economist religion that more choice is good, so you're tempting me into heresy. (Laughter.) I think we have to find a sensible middle ground. I mean, we don't want—it wouldn't be so good if we could only buy one size of jeans, yet when we go into the store and find dozens of different brands, that may be overwhelming. I would hope that when the programs are crafted, they're done in such a way that they don't overwhelm people. In that context, I think the TSP provides a pretty good framework. As I
understand it, there are about five funds and they're pretty clearly explained in a booklet, and people can make sensible choices without having to be an accountant.
JODIE ALLEN, Pew Research Center: What's your view on the time factor?
EDWARD GRAMLICH, Federal Reserve Board: Well, I think—no, I think it's a good question and if—I'm as bewildered as you are by excessive choice. I go to the same church Harvey does, so I have the same heresy risk that I may commit here.
JODIE ALLEN, Pew Research Center: Sometimes you have to deal with that.
EDWARD GRAMLICH, Federal Reserve Board: But when I was—ten years ago—sitting, well suppose you had individual accounts, how would they work? And I came up with, well you'd want
at most four or five funds. You'd want index funds for bonds and stocks, maybe sub-divide those. But I think partly it's maybe frustrating to the individual. Partly you may get, if you're worried about something for 150 million people, you may get bad decisions. And partly, it's just administratively very costly to keep going on a lot of funds. So I think that for realistic program options that you want to keep it pretty tightly constrained. I realize that will disappoint some people who get into this because of the freedom motive. But I think that realistically, you just have to do it, that it's just impossible for me to imagine public programs that don't narrow the choices some, so you still give people options, but not too many.
JODIE ALLEN, Pew Research Center: Actually, we could talk about—I framed it wrong; we should have talked about transaction costs and that's not heretical. But let's—oh, do you want to say something, Bob?
ROBERT LERMAN, Urban Institute: Yes, I want to say two things. First, we shouldn't overlook the fact that it takes a lot of time to apply for welfare programs. Existing programs require lots of time and sometimes they involve also some array of choices that may be confusing. I'd say two things: one, as people are confronted with various choices, I think, just as when you maybe first go into the supermarket your first time, you might feel one way about it, but over time you begin to learn. Maybe you make some mistakes, but over time, you have a kind of learning
process. If you've ever bought a house, the first time is pretty scary. But then you start learning about how to do that.
I think in the area of—but I think that the devil is in the details on a lot of these matters. I think, for example, in the Social Security area, the choices that we should confront people with is not how much bonds and how much stocks, but I think we should be confronting them with choices that are really meaningful, such as what kind of replacement rate do you want? What kind of guarantee do you want? Are you willing to accept 90 percent probability of having a certain amount in return for having some up-side potential or do you want to maximize security? And those are the choices that good financial engineering can now develop, and I think we ought to encourage that in the area of individual accounts.
JODIE ALLEN, Pew Research Center: Let me turn to the audience now. Please identify yourselves and if you want to direct the question to a particular panelist, say so.
GREG SQUIRES, George Washington University: I guess I'd like to direct my question to Mr. Rosen or any of the panelists. One of the key tools for increasing assets in distressed neighborhoods has been the Community Reinvestment Act (CRA), and yet this administration seems committed to diluting that act at every possible turn. I understand that just yesterday OTS decided to make the investment and service test voluntary, and I guess I'd like to ask how you square the commitment to ownership with the cutback on one of the key tools that has been making ownership possible in low-income communities?
HARVEY ROSEN, Council of Economic Advisors: I'm not up to speed on CRA issues. Ned, are you?
EDWARD GRAMLICH, Federal Reserve Board: Yes, I am. There are two changes. Just as a backdrop for those of you who don't know what it is, this is a law that affects financial institutions that benefit from deposit insurance, and what they're supposed to do in exchange for the deposit insurance is to invest in low- and moderate-income loans, also investment in services in their communities, or their assessment areas.
Typically—there are four agencies that regulate banks in this country—and we typically move together on CRA and the reason is obvious—that if we didn't, there would be this search for the bottom and the regulators would like to stay out of that, and I think even the banks would like to stay out of that. So we have typically moved together. Now OTS, the Office of Thrift Supervision, has broken from the pack this year and has gone out with its own regulations that you just heard described. The other three agencies have come out with what I consider a nice middle-of-the-road compromise, which for very small banks, they have a pretty lenient CRA test. For the banks in the middle, we step it up a bit, and for the banks at the top, we retain the old CRA rules. And three of the four bank agencies are fine with this, and we've just gone public with a proposed regulation. There is a comment period on these things, so we'll be in the 60-day comment period.
OTS has, as I say, broken separately and I personally think unwisely—I guess that's not a surprise to hear me say that, because I've said it before. And I'm not part of the administration. I'm not going to comment on their connection with OTS. But I do think that three of the agencies, including the one that I represent, have a proposal that I think would make sense if people would look at it carefully.
JODIE ALLEN, Pew Research Center: Yes.
CATHY NELSON: I'm retired from HUD, and I'd like to ask a question, I guess, of Dr. Rosen, because you're for the administration. But I'm following up on a point Lisa Mensah made about examining the impacts of looking at who is affected by things. And this is that over the past 20 years, 25 years now actually, as homeownership has generally gone up, just straight descriptive statistics show that it has—for all income groups below 120 percent of median—it has gone up for every housing type, every family type, except families with children. And there have been recent increases for families with children, but they still, as of 2001, were not back up to their highs of the late 1970s. And research by the Center for Housing Policy shows that this is true even if you look at families with children—I mean, married couples versus single-parent families separately, and so my first sort of editorial is to say that I believe a lot of the homeownership policies that we have been following for the past two decades have been ones that implicitly discriminate against families with children because they have more people per income and everything else.
And then more specifically, in terms of, what is going with the current administration. I've been told by friends at HUD that as the family self-sufficiency program, which was one of the very first efforts pushed by Kemp back in around 1980 to try to give positive incentives to people who are working their way off of welfare, one of the incentives was to put the money saved as their rents increased for people who started work—these are families with children who are helped by—who have federal rental assistance—as their rents went up, the money was put into an
asset account that they would then get when they moved out of rental assistance. And I've been told that as part of the new effort to encourage vouchers for homeownership, local agencies that have family self-sufficiency programs and have money in the bank have been told that they can't pay that out to the people who have been working, which I frankly think is shameful.
HARVEY ROSEN, Council of Economic Advisors: You know, one issue that was raised is the question of how you adjust means tests for family size. I mean, you know that's a very tough one in the economics literature. There's been lots of work on, you know, family equivalent scales, and I don't know if that's been pushed to the extent, you know, where it'd be a reliable guide to policy. With respect to the housing programs, I'm afraid I don't know the details of that particular HUD program that you're mentioning, but, as far as I can tell, in general, there have been substantial funds proposed by the administration for helping low-income people become homeowners, educating them about how to do it, simplifying the rules for doing so. I think that with any luck, these programs will continue the increase in home ownership rates that you mentioned. Which, as you also point out, are very widespread across the society.
JODIE ALLEN, Pew Research Center: Lisa, do you want to add anything to that?
LISA MENSAH, Aspen Institute: Just that I think it was smart policy. I think the family
self-sufficiency program is a great kind of bipartisan thing. I don't know the specifics of the challenge. I heard this some months ago, too. I think this is the tragedy when the smart policy ideas conflict with other things and we can't—and I think, you know, job reforms like this is to shine a spotlight on what things were working and are working. Again, that's that kind of evidence that not all working poor families are the same. Some—this is one of the structured programs for savings—accrued, as incomes rose so that people were ready to make the transition to home ownership. So that's the gold standard, right, of what you're supposed to be doing—allowing people to take the next step. So I think you're right to—if those things are being compromised—to point that out.
QUESTION: Again, for Dr. Rosen—thank you—the question is, in the Social Security private accounts and I suppose in health care savings accounts too, the prospect is held out that this will help bring lower-income people into the ownership classes. And my guess is, or my understanding of it is, that it's mainly through the ability to bequeath money to heirs for low-income people.
I wondered if—have you done any modeling or can you give us some sense of how much you would expect that to transform asset ownership among low-income people, and how should people think about that as a real way of bringing low-income people into the ownership class?
HARVEY ROSEN, Council of Economic Advisors: I think there are a couple of ways in which I can imagine, you know, the personal accounts as contributing to an ownership agenda. One of them is the one that you just mentioned, which is that it's your money, you can leave it to someone if you unfortunately pass away. As you know, with conventional Social Security, if you pass away before retirement age, the money is gone except in certain cases, survivors.
The other is just the fact that it's your account. You can control how it's invested. You can invest it in something very, very safe, such as inflation-protected bonds. You could put some of your portfolio into stock. You could put some of it into large-cap stock, small-cap stock, you know, a bond fund. And you know, this in itself is getting people used to the idea of control over their financial lives.
Of course, many middle- and upper-income-class people, as your figures showed, already have assets that are matching them. Many low-income people haven't had this opportunity for various reasons, and they can take a shot at it and build their nest egg.
With these sector-specific numbers, I expect to see emerge—you know, I don't have any of those in my pocket.
QUESTION: So we don't know. So we don't know what kind of assets they might—whether there's a model for—I mean, one imagines lower-income people don't amass a lot of assets. So I'm just wondering realistically how much one might expect them to make?
EDWARD GRAMLICH, Federal Reserve Board: I haven't been to any of these White House briefings on the plan, but I think there's also another issue there, and that is that, as I understand it, the administration is thinking of some sort of compulsory annuitization of accounts just to bring people up to a certain level, and I think, by the way, that that is exactly the right thing to do. I'm not critical of that at all.
But if that is so that means that the individual accounts—will they generate wealth that can be passed on to heirs and so forth? Basically only up to the date of retirement because once one retires, then a large share of the accounts would be annuitized, and it would not be passed on. So I think it's—that point is mainly a point that operates where we're talking about, let's say, low-income people who die before they hit the age of 65 or whatever the retirement age is.
JAN ERICKSON, National Organization of Women: I think the child trust fund idea is a wonderful idea. However, I'm wondering whether we could ever get this idea to be seriously considered in these times when we have humongous federal deficits and apparently are headed for even more.
Is there some way that we could build this in, perhaps, with some sort of very brave revision of Social Security? I mean, I'm just looking for ideas as to how to introduce this because I think it's a very important way to really spread the wealth in our country.
LISA MENSAH, Aspen Institute: I think—just could say there is a piece of legislation that Senators Corzine and Santorum have introduced on the Senate side, and Representatives Ford and English and others—I see Leslie here from the—(inaudible)—Foundation—called the SIAC. So there's an active piece of legislation. I think they're going to reintroduce it this month.
The cost for doing this for the 4 million children that are born in the U.S. every year—you know, if you were doing it—I think their 10-year estimates are $40 billion. And they've played
with the numbers about when you start this, by the account started with $500.
I think the question is not only one of cost, but more in the details of how this is—these are all viewed as add-ons because these are additional. These are made before people have income, so you know, outside of Social Security. This is different than the kids save idea, which Senator Kerry looked at earlier, which was more related to the Social Security debate.
But I don't think they're outside of the sphere of discussion. There will be active legislation. I think it is a place to start looking at the savings question outside of the Social Security debate, and I would urge you to follow the progress of the bill.
HARVEY ROSEN, Council of Economic Advisors: I was just going to say something. One possibility would be to do something with the child credit to perhaps say that, you know, if you are willing to put some of that money into an account—I don't know, 50 percent or something—that the government would give you some sort of subsidy at the beginning to put it into a more limited account, a thing that you couldn't use for everything, and that would take away some freedom for you to use that credit. But if you had some incentive to save, especially at the low-income level, you could perhaps do this on a less expensive basis.
JIM BURN, Healthcare Disparities Report: I pretty much wallow in those numbers. And I'm astonished that the administration is still fighting so hard for the HSA. It's by far the most inefficient plan for increasing health coverage. As it's currently proposed, it wouldn't even reach 10 percent of the 40 million uninsured, and it's way, way costly. And there are—now ideologically, obviously, there are very few people in favor of the single-payer insurance plan, which would basically wipe out our health insurance industry, and nobody is running around campaigning on that, but things like increasing some of the public insurance programs—that's a very efficient way to increase it.
So what is in it for the administration to hold so tightly to what is the proven inefficient way to increase health coverage?
HARVEY ROSEN, Council of Economic Advisors: I don't—
LISA MENSAH, Aspen Institute: How can you be so wrong!
HARVEY ROSEN, Council of Economic Advisors: Nobody else is going to answer that one.
Well, you know, the first question about—or the second part of the question is, what do you get for expanding existing public programs such as Medicaid? The problem with those sorts of schemes is what economists call "crowd out"—I guess probably everyone else calls it "crowd out," too—which is that as you expand—that originally when Medicaid came, and I'm sure Gene knows this history better than I do—was for people who were so poor that the question of having a job and an employer who was providing health insurance really wasn't much of an issue. But now we've moved it up to the income scaled until the point where there are people who have jobs and have employer-provided insurance, and they are—what does that mean when they become eligible for Medicaid? Well, what it means is that their bosses can say, oh, well, you don't need the insurance I was providing for you any more because you can go on Medicaid.
So studies by people like, you know, John Gruber at MIT have documented that, in effect, that as you move up the income scale that expansion of these programs because of crowd out doesn't—in effect becomes, you know, a not-terribly-efficient way of increasing net insurance coverage.
With respect to HSAs, of course, you know, it's very complicated, trying to understand insurance decisions and how much to insure, and how big a policy and so on, but the work that I've seen on this question by people like Marty Feldstein at Harvard suggest that this is both an efficacious way to get people insured and to have them be more cost conscious in their health care decisions.
QUESTION: Actually, I'm always skeptical when I hear suggestions that an average investor would be able to assign or to accept a certain asset allocation—how much stock, how much bonds, how much cash. I think it is—in my book it is purely academic except very few people can afford to venture and say how much tolerance they can afford.
Consequently, I would like to point out that when this program was advanced, was there kind of an assessment of what is the percentage of beneficiaries in the future would be able to respond to these kinds of questions? That's number one.
Number two, is there any kind of data to suggest that the implementation of the private accounts is going to add a layer of additional government bureaucrats?
Thank you.
HARVEY ROSEN, Council of Economic Advisors: The first question was, what are the participation rates likely to be in these accounts, and we have not done our own estimates of those. Those estimates come from the independent and nonpartisan Social Security Administration. They have a research group over there, and their estimate is about two-thirds. So that's what they see happening.
With respect to the second question—gosh, now could—oh, additional bureaucracy—again, as an economist, I'll turn that into—you know, something more familiar to me is cost. Is this going to be a very costly kind of program to administer? And the estimates that I've seen suggest that it could be done for, say, 30 basis points; that is, you know, three-tenths of a percent, and that's modeled after looking at the thrift aavings program.
Now of course there are differences: it's a more diverse group of people and so on, but—that you're covering, not just government employees, but I think that provides kind of an
order of magnitude of the costs that one would expect to see in that kind of program.
EDWARD GRAMLICH, Federal Reserve Board: Yeah, I think that Virginia Reno is back there, and correct me if I'm wrong, but I think the National Academy of Social Insurance did a study of what the costs would be on individual accounts, and the numbers that I remember were much above 30 basis points, weren't they? I mean, they were actually two or three times that.
And on the other side—you know, I'm not against choice, but I think we've got to know what we're dealing with here.
On the other side, the administrative cost in Social Security presently is actually a fraction of one basis point. So to go to individual accounts is more costly. There is no getting around that. I mean, just imagine—forms have to go to people, they have a certain amount of investment choices. Somebody has got to take care of this money, you've got the contributions coming in at uneven points. I mean, maybe you've selected individual accounts, and you lost this job, and you started this job, and you've got to keep track of all of that in a way that you don't have to now in Social Security. So this is not to say it's a bad idea, but it is substantially more costly on the administrative side than the present system.
JODIE ALLEN, Pew Research Center: On the question of who would participate, we did ask that in the Pew survey, and they can't release the numbers yet, but we will be putting the survey up on our website—http://pewresearch.org—either tomorrow night or Friday for anybody interested in it, and we also—although we don't show an income break, we do show—
QUESTION: Can't you tell us whether it's consistent even with the—
JODIE ALLEN, Pew Research Center: It's in between. It's in between. No, I cannot. But it—you know, you get more Republicans saying they would—probably an income effect, you know. People with more money are more likely to participate.
EUGENE STEURLE, Urban Institute: One item that I think comes up implicitly, and it's sort of between Bob's three levels of programs, but it's implicit in the individual accounts—is
the notion of mandated saving. If we know it's an issue of whether an individual account is a carve-out or an add-on—we came down from Mars after the thing was created; we said, well, there's another pillar to this social insurance system in the United States. They mandate that some percent—that people pay tax and that money goes into an account. It's a mandated saving program, you know, dodging whether the mandate came because we got rid of another mandate in Social Security or not, it's a mandated saving program, and I'm wondering if there's some extent to which—in this design of our social insurance finality of options whether we're not also sort of toying with the issue of mandating that people participate in various things—you know, mandating that they deposit the pension plans, which is what individual accounts are—or even on the health insurance side, wondering whether we ought to have something a little more like a mandate. Maybe it won't be saving so much, but that people who are more middle class or middle class and they're liable to fall back on society for assistance—maybe we're mandating that some amount of the income be put aside to help purchase their own insurance.
It's a slightly different concept, but I'm wondering if that deserves some attention.
EDWARD GRAMLICH, Federal Reserve Board: Happy to go. I think it's a good point, and it should be talked about. Actually, Lisa passed some information around to the panelists, and I was very taken by a program that she described—or Aspen Institute described that operates in Ireland. And it's a way—essentially it is a corporate mandate that if you're—if you don't have a corporate or an employer-defined contribution account, that you have to have one. And the government mandates that.
There is an issue on retirement saving in general that is—economists use the word "myopia" to refer to—and that is whether people in the heat of the moment will put aside enough for retirement. In this day and age when many people are living very long lives after retirement, it takes quite a bit of savings. And if you just look at the number, a significant share of Americans are falling short. And it does raise the question of whether we ought to mandate some additional saving either on top of or have inducements for it, or somehow as a complement to Social Security.
I felt that we should ten years ago, and I actually had mandated defined contribution accounts on top of Social Security. That idea politically did not have legs, to put it mildly. I mean, people don't like to mandate things, but I think if we don't think seriously about that issue—well, I think at some point we're going to have to think seriously about that issue because it may be that we're just not—as a society and as individuals—putting aside enough. I don't know much about the health area, but I think that there would be similar lessons in that.
So it's certainly an issue that ought to be discussed.
JODIE ALLEN, Pew Research Center: I'm sorry, but we're going to have to cut this off now. I've been told that it is a matter of religious practice that we end promptly at 1:30, but I know that you all will want to join with me in thanking our terrific panelists.
