carried to members of congress in both parties in the house and the senate and people are understanding what the american people don't want, they want the program to be more secure that they have to pay more for it they will so i don't think president obama is of touch at all. >> this gentleman right here. >> my name is gordon smith. i lived in the washington area along period of time and i honestly didn't find a lot of difference in your opinions. i thought they were somewhat close because no one said let's get rid of social security and i think that is the yen and jiang. i went to work when i was 21-years-old and i am now 78. i still go to work and i collect social security but they still

take it away from me. i don't understand that. but if i calculate my social security payments had gone into the stock market not mean making selections but just the average of the market, i would have made 6.9% and real returns over that period of time and now i get about 20,000 year on social security. if i had gone to the other program, i would have had $3.8 million if you amortize it over the rest of my life span, i could take down $305,000 a year as opposed to 20,000. and if the market fell in half i would still have 1.9 million i did have 152,000 year. >> the question i would like to

pose to use social security now invests in short-term government bonds that's not risky. i would argue it's very risky. only one issue or the u.s. government some people say are going to go broke and have to default on the debt that's a very risky and no investment adviser would ever tell you go with one company and put it all in short-term notes. you're not making enough to recover inflation so the question and why is this and social security invest in the broad market? gist ethridge across the board said the cost is low and it would help the country. >> okay. >> i guess a short answer you are presuming there's something to invest, a storehouse of savings we have sitting around but we can choose to make an

investment. going forward in the future we are looking at deficits. >> a surplus between what goes in and comes out each year. >> let me try to strip down the question because i think it's something that a lot of people get very confused about. you're individual rate of return is not a function of follow up with the social security program has invested in, it's what tax rates have you been assessed and what does that benefit from ilyse it is going to give you and those determine your personal internal rate of return. if you look at how different people are treated there are certain broad trends you have to look of the system treats everybody. you can't just look at the bonds, you have to look at the whole package. there's certain trends. one is if it redistributes from higher to low-income people generally and the system redistributes money from leave her birth years to earlier to people who retired on social

security first got a lot more back than they put in and then the next generation came and they were finding their benefits. the reason your personal return from social security might be low is because of because what is happening with the bond and trust fund but because you're dollars paid for the previous generation. as it happens, the worst treatment by far is going to be for young third-generation zandt this is one reason why it's so important to reform the system early because if you exempt people now from the solution, you are locking in enormous negative returns going forward because the personal returns are driven by these demographic forces and the relationship between the tax burdens people. the benefits they can afford to pay them. the last report had an estimate if you just leave current benefit formulas where they are people entering will lose the net 4% of the lifetime wages and that's not the tax burden, that's the loss, that is the

difference between when they collect the benefits and what they put in service system will subject net worth from the generations. getting back this isn't a function of the systems invested if we the formulas work who's paying for what and a certain amount of that is better than the current system already simply because we've got a lot of people in retirement, too late to fund the benefits and invest in something there's only one place we can get the money to fund those and that is by taxing young girl generations and we are stuck with that problem. >> anybody else want to -- heidi? >> on the last point i would say it isn't absolutely that younger workers we could start taxing the non-wage income and financial transactions. we produce general revenue it doesn't have to be supported by a payroll tax in fact some of the work done shows that that first generation that all

generations should be no shared and we would have a decent rate of return. >> it just changes the distribution of pay. the loss is still there. >> assuming a lot of things, i'm just saying you could reform the system to make the system a lot more generous to the younger generation. it doesn't have to go the way you say. >> during the transfers of would still come out of the pockets of the younger generations. that doesn't change the calculation. >> how will this bill gates now? he's not exactly a young. >> with the tax or payroll site is irrelevant to the calculation. it's a generational income transfer.

you can do it through income tax and payroll tax and the loss is the same. >> you could tax people today who are very wealthy and that might help the younger generations in the future. i just think there's a lot of ways to do that which wouldn't have the impact that you are talking about. >> could you talk about and leave these questions aside and just address is a man there is the money to invest i understand there may not be but if there is money to invest why is it that it's invested the way it is? why is the rate of return set the the id is and if in fact the money were invested in the stock market as suggested the rate of return over a certain period of years increasing that amount of money in the fund. >> i would say first why is it the way that it is? the bonds issued in the social security trust fund are

basically under law designed to be reflective of the government rate in the private market. so in the statute what it says is whenever the system runs a surplus a special issue treasury bond to the fund and the rate of interest would be determined by the market rate on all securities with a duration of four years so that's how it's calculated and it's meant to represent the idea that hasn't worked up this week but it's meant to represent the idea because the government to start a from social security when it runs a surplus it has to do less borrowing on the market so the interest is to pay is equal to the rate we would have had to pay in private markets so that's the idea behind it. now as to whether stock investments reduce the size of the problem going forward i would argue know because basically you have a certain benefit your trying to pay and preserve to insulate beneficiary is from risk.

you could offer a high return if they're willing to accept the investment risk and under president bush's proposal for a simple, we could say people can expect a high rate of return from the personal there's a risk involved so they might get higher or lower. once you insulate people from the press the more you can offer is a riskless rate of return which is generally a low rate of return to the government perspective the least cost method wave that is simply through issuing treasury bonds and investment stocks because it is trying to offer a risk free benefit, then basically due to variations on those then met expectations w. we have to have available isn't made any better. i probably didn't word that a very well. andrew has a paper on this, the cost and benefit guarantees that you can reduce them by stock so maybe i should like andrew go. is connect certainly hi fever personal accounts in the past so the question you're asking if i

instead had invested in stocks i would have done so much better. okay. there's a couple reasons why that doesn't really work and i will say this argument was the behind the idea of personal accounts and made it attractive and at the end of the day i don't think it's correct and the reason is the social security is an intergenerational program. so lewd would be great if i could take my money out and put it in other investments like a bird a higher rate of return without taking any risks, just putting it in government bonds. the problem is is currently paying for my dad's social security so, unless i want to cut his social security which i might be willing to do on the family basis thomas lynn melling to cut the social security we have to come up with extra money to pay eight. if i have to pay extra taxes to pay his social security while taking my money putting it in the stock market the rate of return sort of balance is out because of that. you have a transition cost. once you factor the transition

cost, the market rate of return is necessarily higher. now you can get some return by investing in risky assets, by investing in stock you get a risk premium and that is how the market rewards you. he would have invested in stocks and got in the risk premium and would be a winner. other people would have been a loser. the stock market doesn't give away money for free. the return is a compensation for risk and doesn't give it away unless there's a risk about losing money. i've done studies and papers showing by and large investing in stocks has been a great deal. the problem is what happened in the past may not happen in the future. we take the issue with transition cost from a pay-as-you-go system and the issue of market risk the rate of return is what is and there isn't anything we can do to improve it. >> you are absolutely right in that but i can't remember more people know that than i do probably the clinton administration had the commission when a was 20% to go

to the trust fund i thought there was a terrific idea because the individuals taking the risk it is the shared risk of the government, and the way things have gone on the table anymore that was a good idea. >> here's the kind of rhetorical question how the municipal and state pension funds invested in the stock market what models are made for that. [laughter] >> that's important because this temptation to try to think to ease a bit part traces by turning more and larger social security to the other parts of the retirement scheme three devotees because the same problem everywhere we go. people say well, the 401k accounts, we need to have more defined benefit pension savings but then you look at all to defined systems, the same problems to the employer

provided systems, state and local systems, social security, you see amazingly similar problems but each is about 1/5 to a quarter underfunded, each underfunded for similar reasons which is that it's easier to kind of promise more than you can actually willing to fund. it's easy to rely on accounting methods to hide the actual scope of the problem and the state and local pension systems they hid behind aggressive discount rates to make the light of these looks more the use the trust funding to make it look smaller. but the bottom analysis is that no matter where you go you're not doing anybody any favors by promising more in benefits in the system has resources to pay. that is equally true in social security as in the other systems. we have to be careful before we start talking about benefit increases that we only do this in the context that will action to balance the system's books. if we do it outside of that we are making empty promises and that isn't doing anybody any favors.

>> i would like to jump in and say the groups that are proposing government increases are indeed proposing ways to pay for them. i did want to go back to the issue of the wealth and income would talk about how the income is very unequally distributed and even more unequally distributed and by and large, it is the older people who have the larger accumulation of wealth. on average people are not particularly rich and are on average relying on social security. but where the wealth or are a different generation from the struggling parent who at the same time they are paying people taxes and supporting young children. so i think if we tax financial transactions of investments, if we tax wealth it will was transfer a problem the you spoke about because we did have a transfer to that earlier generation sort of gift and we haven't really made up for it in the system and according to the war such analysis that is

responsible for part of the shortfall that we have now. that was my proposal. i think my proposal does make some rational sense. i would like to suggest that. [laughter] >> yes, right here. >> from the wilson center think you also much. this has been a really interesting. understanding that there's a difference between what he might like to have happen and what is politically possible, can we just look at what we might like? my assumption is if we think about the impossible it will never happen, so just to speculate a little bit, the question of if we raise the level, the income level you have to go on paying taxes we could take care of the problem, how high would we have to raise that level? what we tax all people in, wouldn't go to a certain amount of the 186,000 or what would it have to be? the second question coming into

this this picking to hot-button issues together. it does anyone think about the consequences, the possible consequences on social security income of immigration reform, are there economists' thinking about that and what the impact would be of legalization on the social security system assuming that there are a lot of undocumented immigrants who are not now paying social security taxes. >> let me just talk about first piece, about scrap the cat is what some of my friends want to do. i've been with social security so long. one of the basic things of social security is adequacy and equity. adequacy that lower-income people got more return than the higher income people but equity was higher income people get somewhere. if you just raise the cap of winep, where is the support for

the program? the decision makers would walk away from the program. what would happen if you raise the cap, take away the capex it's ridiculous we get no return. as far as immigration those i would be much more knowledgeable about that than i am but i do know that many immigrants are here and pay the social security and the money goes into social security and the never collected so it's not all -. >> obviously i disagree with barbara about listening to the colistin the cap. there is no cap on medicare -- >> but it's a much smaller percentage. >> the tax is a smaller tax it's true, but i think there is a

general agreement we can find out from the other panelists when the congress set the rate cap in 1983 it was covering about 90% of all salary and wage income, and now it covers -- the cap hasn't kept pace with the inequality which has so much of income salary and wage income far beyond the cap now that we would have to raise it to it think about $180,000 to get back to the level that we were at. that does not make up for the 28 years or so that we haven't been capturing 90% but that would go along way. you would be for debt.

>> i have a different perspective about policy but i want to talk about the analysis. first full before i get into the analysis, there's a very good peter on this that cannot by mark that i recommend to people that you often hear people say that in 8390% of all ages were subject to tax. wouldn't it be good from the equity perspective to get back to 90%, and of course as he said, the reason it slipped is because of asymmetry of earnings we have a lot more earnings above the cap and below. with the paper shows is the reason we have this skewed earnings distribution as most of the growth has been we have here, super rich is where a lot of that income growth is occurred and when the skewed the growth occurs it causes it to rise more rapidly. now it drops as a percentage of the whole of the people that get hit the hardest are just right above the cap so if we go back

and say because of this earnings we are going to raise it again to cover 90%. we're going to disproportionately hit the people who've already been hit as a consequence of the faster because of this q earnings growth on the tops of its appealing at first glance in the equity argument but it doubles on the people who got the biggest hit. people below are not hit when the cap goes up faster if they are indifferent to it. people love of would get hit those are the people hit the hardest over the last 25, 30 years as it is. from the fiscal perspective you have to be careful. 180,000 is about the level but remember in the social security system benefits and contributions are linked to collect more in revenue you obligate more benefits so you have a reform for the first approximation brings more revenue to the system that makes the initial payments to people who need them the least. if you go to the studies that look at what happens you take off the cap completely obviously

you're paying these benefits to people who are incredibly rich and you still don't sold more than a fraction of the problem now you could come in to could choose to sever the contribution and not pay benefits on that. two points about that. one is that fundamentally changes the nature of social security. george's of a link in the benefits and maybe we want to do that is the type of system than we have now. we have to have a very knowing decisions we basically want to bring that barrier and destroy that flank before we do. it seems to get you from the perspective in reality doesn't get that much it postpones the deficit by a few years and because of that a lot more bonds in the trust fund but the deficits go on starting in the mid 2020 s and go on forever and if you look at the year by year flow with the proposal that doesn't accomplish as much as you might think from a perspective raising it back to 90% only close is about 15% of the cash shortfalls even though it seems to do a lot better if

you look at the trust fund of it. >> i will make a quick point on that because i think talking about raising the tax cap is we have spent a lot of time that it makes sense because it is one of the policies that is out there. i would agree if you eliminate the cap that the trust fund buildup which would be spent on something else and then bigger benefits down the road you have to think those bigger benefits on the road somebody's going to have to pay for them so i don't think we are solving the problem in the bookkeeping sense for future generations. the second point i would make is the effect of the cap on the top tax rates and it's worth running through a little bit of a quick math. under the obama administration's proposed budget, the top income-tax rate will eventually rise to a little over 40% to get rid of bush tax cuts and eliminate a couple of exceptions. the medicare payroll tax rate has risen to a little bit under

6%. the top estate tax rate to around 6%. put those together and the top marginal tax rate for somebody today is around for the industry should proposal around 53%. if you are in a high tax state the additional dollar you pay more than half of that she either government in washington or the state level. he limited the tax cut for social security, you are adding on ten percentage points of the top tax rate goes on 63% of an additional dollar so they pay the government. i personally philosophically think that's too high from the economic perspective and i think it's particularly too high when you say that all of this assumes we haven't done a penny to fix medicare or medicaid which are much bigger problems so you've got the top tax rate 63% without fixing medicare and medicaid you are in big, big trouble. >> we are going to have to close dillinger ask any final thoughts and/or their other countries thinking about this in a

different way and what insight might we draw from that? are other countries willing to pay 63%? >> i guess the one thing i've been thinking about a lot is looking at the british reforms now. one of the things i think it's quite interesting is that during the fiscal crisis britain brought in a government that was a conservative government, and was conservative and liberal space government coalition. and they evaluated the possibility -- we were in the midst of the wheat cultivation of the social security system and also considering a number of options and the privatization or adding more and dredging private savings and what was interesting is even during a very, very deep

-- the government in contrast to hours has initiated major cuts, a major deficit-reduction, cuts across the board and the government deficit of 20% to 25%. they decided not to cut social security in britain and instead have initiated a system of private individual savings accounts that is going to be added on top of social security and is going to be financed by an employer contribution an extra employee contribution of 3% each. so why think that it's telling for where we are in the u.s. today. that just because of cutting the budget deficit we don't need to cut social security which is set low level of the adequacy of ready. and to encourage more savings and then we can think about

adding to people's tax burden to fund the types of legitimate retirement income that they expect in the future. >> one of the things we can be sure that is increased longevity we have time to continue to debate these issues and hopefully in the near future we can have time to talk about medicare and medicaid which we haven't really touched on but it is an even bigger problem and one we should talk about so i hope we will be able to bring some panelists back to that. please join me in thanking everybody very much. [applause] please note copies of i think the one book on social security are available for sale. thank you for coming. [inaudible conversations]

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for remarks from elizabeth warren, assistant to the president and treasury secretary timothy geithner. >> it really is a treat to be here today. at our first conference any conference that fittingly is about data and measuring the effect of a new set of rules on part of the credit industry. one year ago today many provisions of the credit card accountability and disclosure act took effect. we come together on this anniversary to mark the event but our primary goal is to analyze and discuss the impact of the card act. at the consumer protection bureau, we are determined any actions we take will be grounded in a deep understanding of the market we are overseeing. our organization reflects this

commitment. search and ruleriding are brought together in a single position in the new bureau comprising five expert teams in specific market areas. the card market team was the first to get underway and this conference represents the kind of work we plan to do on an ongoing basis. one year after the card act took effect it is appropriate to ask whether it had its attended effect and how the credit card marketplace has changed as a consequence of this new law. there are clear causal links we need to draw now. and work connection are more tenuous we need to keep asking questions and analyzing data. we must recognize the limits of this approach. public policy formulation cannot be put on hold until every question has a definitive answer. the data will always be limited and the answers will never be definitive.

even so we will work to formulate policy based on evidence and rigorous analysis. this conference is important to the agency. i will work with you today to help inform the way the new consumer bureau will approach the credit-card market. we hope to leave here with a better understanding of policy implications of what the data show and how to frame the research questions that remain to be entered. when the act was signed into law in may of 2009 was clear the credit-card market was in need of serious reform. congress concluded certain practices in the credit-card industry were not fair and transparent to consumer and the card act passed with strong bipartisan support in both the house and the senate. as president obama said when he signed the card act into law the act was intended to uphold,

quote, basic standards of fairness, transparency and accountability. the concerns that gave rise to that were not profitability for the credit-card industry but rather the message is to generate some of those profits. pricing had become too opaque. self issuers had understated price up front, counting on interest rates, fees and penalties and other often unexpected charges to let the company charged an overall higher price than the consumer anticipated. the harm to customers was significant but the harm to competition was also substantial. some issuers explained that when they made improvements in cards potential customers could not tell. so for example when one of the largest issuers in the market

dropped clauss amid much fanfare, the cards were so complex that customers could not tell. within a few months the company reversed course, reinstituting universal the fault. so the card act was designed to reduce surprises in repricing of accounts and take a major step in improving the overall transparency of credit card costs. as a result of the card act consumers have better information about how much they are paying for credit and how much they might pay on interest if they paid down their balances more quickly than they might otherwise have planned. thanks to the card act there are no more shifting due dates and customers have 21 days to make their payments, both of which should make it less likely that they will be hit with an expected late fees. a year later the card act

brought about major changes in the way the industry operates. in part this is attributable to the protection congress enacted. the data we have assembled to indicate that much of the industry has gone further than the law required and in curbing repricing and overlimit fees. a number of issuers have eliminated some of the practices that can confuse customers and cost them money they reasonably did not expect to pay. lenders in the industry deserve credit for moving in the right direction. not everyone embraces this approach. as soon as the card act became law some lawyers were asked to find different ways to accomplish that which the law was intended to prohibit. to its credit the federal reserve board responded with a rulemaking proceeding designed to close the loophole. i doubt anyone thinks this is the last time such a rulemaking

proceeding will be required, we can probably agree that this approach, avoid a rule or another rule and so on, is costly for consumers and costly for the industry. it multiplies the number and complexity of the rule this approach creates special challenges for those smaller banks and credit issuers that still offer credit cards to their customers. i believe the card act is pushed in the right direction. it has brought about significant reform in pricing practices of credit issuers and the information provided to consumers. even so substantial challenges remain. thinking about the approach to regulation and how to approve markets without an overreliance on rules will be our next challenge. we all believe and have experienced benefits of competition. when markets work well and efficient producers and shoddy products are more likely to fall

under their own weight. with competition consumers tend to get improved product choices and lower prices. competition may also increase the rewards to firms that innovate in ways that consumers value. for a market system to fully serve the interests of consumers consumers need to be able to understand the cost, benefits and risks of alternative products and to be able to compare those products straight up. by this standard in the credit-card market, we have more work to and the task is formidable. even with improvements brought about by the card act there are a lot of moving parts in a credit-card price. despite the important progress made at improving the schumer box disclosure and monthly statements, it is difficult for many consumers to understand the cost and risks of each individual credit card or to compare cards directly.

our next challenges will be about further clarifying price and risks and making it easier for consumers to make a direct product comparisons. our new consumer bureau will make clarity a top priority. industry representatives have expressed their willingness to help and many consumer groups and academics are committed to helping as well. we want to work collaborative the with all parties. a part of that collaboration, we want to be sure we understand the consequences of the card act, both intended and unintended. this conference is a first step in that direction. so i anticipate that today's event will provoke some thoughtful and informed discussion about what has changed since the card act took effect and what those changes mean for consumers, issuers and the market and what remains to

be done. that is the most fitting way to commemorate this one year anniversary. is also the right way to launch a new conversation that uses our collective brainpower to advance more efficient markets. so thank you again for your time and your energy. thank you for being here today. we need you. th