“By creating private accounts, you’d create private assets and private assets could be passed onto another generation as capital. And I think that would change the lives of millions of people,” says Wade Dokken. And Wade would know. A former advisor to Hillary Clinton, he is the President and Chief Executive Officer American Skandia, Inc. a financial services companies in the country, with more than $30 billion in client assets under management.

James Glassman: Wade Dokken, you have written a book about Social Security, what ‘s the title?

Wade Dokken: “New Century, New Deal, How to Turn Your Wages into Wealth through Social Security Choice.”

James Glassman: You know, so many people who write about this subject are policy wonks like me. How did you get involved in it?

Wade Dokken: Well, that’s a great question. I have always loved public policy but this was more motivated by a series of things, I would say three or four things. One is my love of public policy, my access to information about how out of line our Social Security system is and what we can do about it, and the fact that I, like a lot of people, am a parent and I have three boys for whom I know the Social Security system is not going to deliver.

James Glassman: Now, what would you like to see as far as reform for Social Security is concerned, just briefly.

Wade Dokken: Well, the most important thing we need to do is we need to have a funded versus an un-funded system. We need to be honest about putting aside money now for the retirement of people at a future date. Today we’re not doing that.

Once we’ve established a funded system, I believe we need to invest it in what I call a modern way, so that those assets that are set aside are being invested as any modern portfolio manager would invest assets, whether that’s like the state of California or the state of New Jersey or anybody’s 401K.

James Glassman: When you say a “funded system,” I think this is worth spending some time on. How does the current Social Security system work and how is it similar or not similar to a conventional pension plan?

Wade Dokken: Well it’s not similar to any other pension plan because the law of the land of the United States is that you can’t have pension plans like Social Security. Social Security does not have any assets set aside for anybody’s retirement. It’s a pay-as-you-go system. You and I as under 62 or under 65-year-old taxpayers pay money in, and people who are now receiving Social Security receive that money within 30 days. It’s a conduit system. What we pay in, somebody else receives. Therefore it is dependent upon, when I retire, another generation of people to be doing the same thing.

The problem is — and it is the crisis question — the demographics of this nation have changed profoundly in two ways. One, longevity has increased tremendously so we have an ever-increasing percentage of our population that is over age 62, 65. And all those subgroups are the largest growing groups of our population.

The second part is our birth rates are way down. So not only are we living longer but the replacement population is smaller. When Social Security was created we had 43 people supporting every retired person. Today we have 3.1 and in a very short matter of years we’ll have two people supporting every retired person. It won’t work.

James Glassman: And so your solution is to allow individuals to invest part of what they now pay in payroll taxes in private accounts in stocks and bonds, is that correct?

Wade Dokken: That’s correct. That’s the third part. I said number one: a funded system. Number two: invest in a modern way. And the third conclusion, I believe, is to allow people to at least have the option of having their money invested in private accounts.

James Glassman: And exactly how would that work? Would people be free to put their money just about anywhere, the way they do now with 401Ks? The 401K plan, of course, is limited by the offerings of the employer. But there are hundreds, probably thousands of choices, is that the way this would work?

Wade Dokken: I doubt it. It’s not what I would recommend. Social Security is the foundation retirement plan for all Americans. And as such, if that money is squandered in any way, you would have a social crisis. So I think what would happen is there would be some significant limitations.

I believe a recommendation would be to let people invest in bank CDs which are guaranteed and are very safe and have a rate of return that is far in excess of Social Security’s rate of return today.

It is also possible that you allow people to stay invested in a Social Security system and that all the money is held in a pooled account and managed like any other state pension system.

A third option is to allow people to have a limited number of choices and those choices would probably be automatic portfolios that have a combination of stocks, bonds, and cash so the risk would be very low.

James Glassman: Now when you said your second option, which is pooled accounts, are you saying that you think that it would be a good idea if, let’s say, government employees or a government-run board were to make investment decisions for Americans? That is what, I guess, Alan Greenspan has been alarmed about, the notion of the government itself becoming a large shareholder in American corporations.

Wade Dokken: I think it’s a possible outcome, but it’s not one that I support. The reason I don’t support it is I believe the politicization of it would be too great. For example, if the government owned the stocks, who would vote the shares of those stocks? I think that’s a problem. I think quickly it would be politicized another way, in which the government would set up laws that we can’t invest in certain types of stocks.

So it’s not a proposal that I personally support, but I think it is a proposal that is supported by almost half the people in Congress.

James Glassman: But you don’t think, in general, that people should have a wide range of choices. Another model might be the thrift savings plan, which is kind of the federal equivalent of a 401K plan.

Wade Dokken: I think that’s a very good model. It has five choices. It’s a great model because there are limited choices, they’re indexed funds, and there are very low fees.

Currently there is a way to save for college education which is known by a lot of people, it’s called a 529 plan, and what occurs in 529 plans is, you get those five choices. But there are combinations of stocks and bonds already established. So, for instance, as you’re younger, you’ll have a higher percent in stocks. And as you get older and you have less time to take risk, [the plan] would automatically [move savings] to a lower [risk of investment]. And I think some kind of structure like that would ultimately be the best thing to do.

James Glassman: Now let me get this straight. Is a reform of this nature intended to save Social Security in a financial sense? Or is it to provide Americans with a way to own their own retirement plan and have more money when they retire?

Wade Dokken: Well, I would argue that it’s both. Social Security is a bankrupt system. At one point, we can model that it will be $27 trillion in deficit in about 30 years. So there’s no financial scenario except for a growth rate for the U.S. economy sustained over decades that we’ve never achieved that will bail it out.

Having said that, one of the things that is important to realize is that the kind of implicit rate of return for Social Security today, for people under 50, is approximately zero. And it gets negative as you get younger. Compare that to the worst 50-year period for the stock market, which is plus 4 percent.

So we can save Social Security and at the same time create an income stream for people retiring which is greater than Social Security.

James Glassman: Now some people say this is not a good time to bring up the idea of reform that involves any kind of stock market investing. Isn’t it risky for Americans to have their retirement dollars tied up in the stock market?

Wade Dokken: Well the risky scheme would be to do nothing. I can guarantee you that people will lose money on Social Security if we do nothing. So if guaranteed loss of your investment principle is safety, then we have the safest system we can create.

Having said that, there’s no level of analysis that does not tell you that owning a basket of stocks and bonds over a long period of time is going to produce superior returns. And the risk is focusing on the very short period of time, or the risk is having an insufficiently diversified portfolio, both of which would be solved by using indexed funds and having long-term, pooled accounts.

James Glassman: So the point is that over a long period of time, if you have a diversified account, the riskiness of
stocks is