There's nothing scary about plan for Social Security investments

It seems likely that Social Security reform will be Topic A for the next year or so, especially if Iraq's progress toward forming a permanent government goes well. But it also seems as though the fate of our retirement funds causes almost as much apprehension as the future of Baghdad.

So in the spirit of calming fears on the Social Security front, let's examine a scare story making the rounds. It is the claim that history all but proves attempting to save enough for a comfortable retirement will be impossible.

Princeton University economist and New York Times columnist Paul Krugman has become a sort of lead alarmist against Social Security savings. He recently claimed the growth of invested wealth won't amount to more than about half as much as needed, an estimated 6.5 percent a year.

But his own assumed numbers are: 3 percent annual growth in dividends reinvested and earnings growth equal to the growth of the economy, which historically has been 3.4 percent.

That adds up to 6.4 percent. Close enough, says frequent Krugman critic and investment researcher Donald Luskin. In fact, 6.5 percent adjusted for inflation is the annual growth rate in securities values over the last 75 years, which includes the Great Depression.

But Krugman is not so easily discredited. He also claims that if the 6 percent-plus return on securities investments were to happen, Social Security payroll deductions would increase so much that the retirement system would remain solvent, without what so many call "risky investment schemes."

But Krugman apparently neglects to note that benefits owed would soar, too, because our monthly payments would be indexed, or tied to, wage growth nationally. It simply makes sense to recognize that investing some of what we pay would bring us more money in the end than not investing.

The boogeyman vision of millions of us picking bad stocks and shaky bonds wouldn't show up because there is no way Congress or any president would allow investments to be made without tight restrictions. And if all securities declined over a long period, the state of our savings would be the least of our problems.

As noted here before, it makes sense to invest some of our income through Social Security whether the system will collapse anytime soon or not. Why perpetuate what is at best a "dollar-in, dollar-out" proposition, much like putting your money into a shoebox under the bed?

Then there is the obvious benefit of steering trillions of dollars into the economy, something that inevitably creates additional wealth and higher securities values through the decades.

It was noted in this space Friday that the high saving habit of the Japanese has helped boost that economy through the years. By contrast, we're pitifully poor savers.

One last voice to be heard from here is that of Franklin Delano Roosevelt, speaking at the White House in 1935:

"... Any Social Security plan should include voluntary contributory annuities, by which individual initiative can increase the annual amount received in old age. ... Government funding ought to be ultimately supplanted by self-supporting annuity plans."

I hope this idea passes Congress THIS YEAR.

I fear that it won't happen anytime soon.

The Dem's are starting to demagogue the heck out of the idea and scared mid term candidates on the republican side will not back the president.

It is the way of things.

On the bright side, social security is the easiest of all mandated social programs to fix. Unfortunately, it is probably the smallest and least damaging of the load of bricks hat we will run smack into by 2018.

The financial cliff that we will be falling off at that time will dwarf the SS problems.

I expect a two or three dollar fuel tax to cover this mess and the economy will crater if they do not address this looming crisis and phase these fixes in with some real creative reforms.

The first thing I think needs to be done is to take social security and Medicare off budget so that excess monies in these programs are not spent by the general budget and are invested for future expected outlays.

The personal accounts are one way that we can achieve this constitutionally.

Good points.

"[W]ouldn't it be cool if some maverick congressman, say Tom Coburn just elected from Oklahoma, proposed a bill to kill the Thrift Savings Plan that federal government workers have, say because it violates the equal protection clause of the Constitution, or else because it's absolutely hypocritical? Here's an idea -- if/when a final bill to offer something like that for non-government workers comes to a vote, adduce a rider to that effect. Consider it a poison pill. So, the failure to pass this needed legislation would at once kill the TSP. Maybe self-interest would rule.

James Crystal

Shorter Kinsley:

1. His economic analysis: investing $100 billion more a year via private Social Security accounts in a $45 trillion stock market (0.2% of capitalization) will "bid down" the return on all stocks to the level on government bonds. Ergo privatization can't work. QED.

2. His social principles: investing Social Security in real economic assets to close the funding gap can't help and must fail because it is a zero sum game (see 1), adds nothing to the economy and ends up only taking from others.

OTOH, closing the funding gap on a paygo basis with tax increases, as we always have since the tax rate was 3%, and with benefit cuts, is superior because ... um ... they add to the economy? and don't take anything from anybody??

Both of which are nuts.

Jim Glass

For Lord’s sake, the point was never to invest the money for the sake of improving the stock market. The stock market is doing just fine, thank you – it’s Social Security that needs the help!

The point of partial privatization is to allow people, by choice, to get greater returns by doing the same thing with their Social Security money that so many Americans do with their 401-k's. It seems ridiculous that, when people get such better returns through these investments, workers are still required to invest in a government-run Ponzi scheme.

Whether stocks or bonds are sounder ventures is also a questionable issue. When an outside person lends the government money, that note is called a "bond." But when the government confiscates the money invested in Social Security and then writes itself an I.O.U. -- well, this is a bond of a different color. To treat this like a bond you or I could purchase is disingenuous. It’s like the difference between 1) borrowing money from a bank to buy a car; and 2) taking the money to buy the car from some other account supposedly dedicated to some other purpose, like your child's education, and promising to pay yourself back later. One is an honorable legal transaction; the other, unless you truly have iron discipline, is an invitation to disaster. (And don’t we know the government has iron discipline!)

Modern liberalism is a funny thing. Millions of Americans invest in private retirement accounts, with reliably profitable results. Yet current liberal dogma requires a man as sophisticated as Kinsley to pretend that the stock market is some exotic racket, which any sane person should approach like a terrified spinster considering a date with a sinister gigolo who has asked suspicious questions about her bank balance.

Another name for the stock market: the American economy. Investing in it genuinely creates wealth, rather than passing it back and forth in tricky pyramid schemes, or lending it to the government for pork barrel giveaways. Perhaps Kinsley considers the American economy a bad risk. But then it's hard to see how the country could have any money for Social Security benefits in a few years. At least, liberals should be honest about what they're giving such a vote of no confidence.

Michael Ladenson

How is this proposed change in Social Security any different then the shift starting in the 1970's away from defined benefit plans to 401-ks? It seems that this change will be on a smaller scale then that and not one of the suppositions of Kinsley or other naysayers happened from then 1970s-80s.

Patrick A. Joy

The only germane argument concerning equities vs. fixed income, which must be explained and re-explained, is that over the entire run of data (1926-present), the average annual return to equities has been 10.4%. That's not a projection or an expectation, that is the actual live average annual return. If funds are invested with a long term horizon (at least 10 yrs), the investor has an excellent chance to average this sort of return and virtually a zero chance of failing to beat the current Social Security expected return (such as it is). There have been only 2 periods longer than 10 years that have generated negative returns (1929-1942, -1%; and 1930-1942, -0.4%). The longer the funds are invested, the greater likelihood the expected return will be reached on an overall average basis. As I constantly remind my clients, the returns in any given year may be positive or negative and, in fact, an allocation may never actually realize the expected return on the button in any single year during the entire life of the portfolio. Discipline and a long term horizon are the keys to positive returns. The clear fact is that aside from the Great Depression years into early WWII, if an investor can stay put for 10 years, he can expect a return from the equity portion of his portfolio that dwarfs returns from the current allocation. Stacking that up against the current expected return of less than 1%, looks like a no-brainer, which of course is why Dems will resist.

When and if personalization is implemented, we can anticipate a complete and specious disregard for two terms: long term and expected return. The first time single year returns are below the long term expected rate, expect to hear a chorus of "I told you it wouldn't work, see my account actually lost money this year!" The amount of education that must take place among the general populace is probably the most onerous task in this whole scenario. But then again, many of us have been dealing with 401-k's for years. What does an average annual return of 10.4% look like? If an investor contributes a one time $100 today and 30 years from now he has averaged a 10.4% average annual (compounded) return he ends up with $1946. Adjusting for 3.2% annual inflation, buying power over the same period ends up at $805. Can we expect a 700% purchasing power return on investment from the current system? 200%, 100%? I think not.

Byron Sanders

-- all from http://www.poorandstupid.com/2004_12_19_chronArchive.asp

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