The Pension Disaster That Awaits

If Social Security fails, CFOs will have a serious problem on their hands, says former Fidelity fund manager and current Harvard professor Robert Pozen.

During his days as a senior executive at Fidelity Investments, Robert C. Pozen was wary of mutual funds with too few stocks. “Ex-post we are all geniuses, but ex-ante it is pretty hard to figure out which ones are going to go up and which are going to go down,” he says. Always a “great believer in diversification,” Pozen now teaches at Harvard University’s Kennedy School of Government. And, he says, the importance of a broad portfolio has since been highlighted by what happened at Enron, where a heavy concentration of company stock in employee 401(k) plans is causing thousands to lose their life savings.

Diversification may also be a key to Social Security reform, he says. As a member of President George W. Bush’s commission to overhaul the system, Pozen, 55, helped design the three options noted in the commission report in January — options allowing participants to divert up to 4 percentage points of the 12.4 percent payroll tax into private investment accounts. The 16-member panel was widely criticized as being stacked with proponents of private accounts, but Pozen insists that Social Security’s future solvency depends on a combination of structural reforms and diversified personal accounts.

A former Securities and Exchange Commission official, Pozen is dismayed that Corporate America is “noticeably silent” on the subject. “This is a serious problem, and it is going to impact all CFOs pretty soon,” he says, noting, for example, that changing benefit patterns will cause workers to retire later. Social Security reform will reverberate through the 2002 elections, “and business has a choice to be a player or not on this question.”

During a 15-year Fidelity career that started as general counsel and ended as vice chairman and president of the management and research unit of the $900 billion asset giant, Pozen was often the public spokesperson for the notoriously secretive firm. While widely credited with orchestrating Fidelity’s turnaround in the 1990s, he announced his departure by “mutual decision” from the family-owned firm when Abigail Johnson, daughter of CEO Edward “Ned” Johnson, was tapped to head Fidelity Management last May.

Pozen, who recently published the second edition ofThe Mutual Fund Business, sat down with CFO deputy editor Lori Calabro to discuss the Social Security commission’s findings and the current state of retirement benefits.

You were appointed to the Social Security commission last May. What was the commission’s specific charge?

There was a lot of ambiguity about the charge. We viewed it as making the system move toward solvency, and using personal accounts as part of that strategy. Obviously, there is a group that hates personal accounts and doesn’t want to do them at all. Another group thinks if you only have a personal account, then that will solve everything. The commission said neither side is right. What you need is a combination of structural reforms in the system with a personal account.

The commission came up with three options. Are you partial to any one?

The first option is just a throwaway. It’s a personal account without any change in the system, and that’s not a serious proposal. Options two and three are both very serious; they help the system get back to solvency and allow people to have personal accounts as a way to get back toward future scheduled benefits. But neither reduces the current levels of benefits.

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