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My Fox Column…
Monday, October 6th, 2008…this week explains why critics are wrong to say the market meltdown proves that privatizing Social Security would have been a bad idea.
27 Responses to “My Fox Column…”
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Hell, tell ‘em that maybe privatizing Wall Street wouldn’t be such a bad idea.
I keep seeing “the stock market outperforms SS returns”, but where ever I look whenever you factor in returns of low risk investments AND the cost of insurance matching the survivor/disability benefits of social security you come out either even or ahead for SS.
bobzbob
What investments are you looking at that end up providing a return on investment of less than 3 percent? If you stuck all your money in low risk CD’s you’d still be looking at a lifetime return of nearly 4 percent. SS doesn’t generally cover much more than the rate of inflation in good years. It’s a crappy investment and with the wild shifts in the American working population anticipated in the near future it also isn’t a very secure investment. I’d venture a guess that if you try hard you could in theory do as badly in the market as you do with SS but you wouldn’t, and the results of using that money in the market as opposed to taking it out of the market would help the economy. But hey retire on that 900 bucks a month if you want to, it sounds like a bum deal to me.
Radley, where do these figures come from? Foxnews.com is apparently not so big on the hyperlinks.
Jim,
Yeah, I sent them, but they didn’t get through the editing process somehow. I’ll put them back in when the piece gets re-posted at reason
The 1.5 percent return from SS is pretty standard fare.
As for the historical data, I got much of it from Cato’s Social Security pages (socialsecurity.org). But if you look at the history of the Dow (this interactive chart is pretty cool: http://finance.yahoo.com/echarts?s=^DJI#symbol=^DJI;range=my) , for example, you’ll see that any portfolio that did as well as the Dow would have yielded much higher returns over a 30 year span than 1.5 percent. Even if you’d gotten in at the height of the Dow just before the 1929 crash (343), by 1958, the Dow was between 450 and 600.
And that’s the bottom worst 30-year span I can find. Even if you shorten the span to 20 years, the late ’20s to late ’40s is the only period where you wouldn’t have done better than Social Security (and where you’d actually have lost money).
(Formerly known as Matt. There were too many of us to keep straight)
Anyway, I don’t think it is plausible that the government will allow us privatize your social security account. The money we pay through payroll taxes is going right back out to our grandparents. Social Security isn’t retirement, its wealth transfer.
That, and if we are suddenly putting our tax dollars into private accounts, what would we be allowed invest our money in? It will most likely be securities that are approved by political connections. What if W got his way back in 2001? Would he have made us put social security funds into mortgage back securities and treasury bonds? It all sounds like more government intervention in the market to me. If I’m missing some finer details, please educate me. But I’ve always believed that the scenario above would result from SS privatization because…well because the government still controls it and they pretty much fuck everything up.
Couple of points:
How much money is required to fill the gap caused by younger workers no longer contributing? Last I looked, it was a very large number.
How much money gets lost to the fund managers who are managing all of these individual accounts? Compare and contrast with the overheads of individual health insurance vs group plans.
Finally, under this plan, what happens if you’re retiring during one of those windows where the market goes to hell? It’s not exactly your own fault there, but you’re still screwed.
Thanks, Radley. Just to clarify, your “returns” from the Dow ARE NOT the value of a lump sum investment bought in, say 1928, at a maturity date of 1958, right? IOW, you’re not assuming that the entire nest egg has thirty years worth of returns on it. Right?
As a side question, why 30 years in these tests? Why not 40? Does the picture stay the same at 40?
My concern with privatization was never that it wouldn’t work and that people wouldn’t make money overall.
Ideally, one’s funds could be invested in any stock at all, but my understanding is that there would be a limited number of choices for one’s social security investment.
If there’s a limited number of choices, somebody has to be the one to choose what those choices will be? Who will that person be? How will we find someone knowledgable enough with clean enough hands? And won’t we be placing a tremendous amount of power over the market in the hands of this one person?
CC
Your argument seems to be that this crash wouldn’t have affected private SS accounts because of the proximity of the crash to the inception of private accounts. That doesn’t speak to the trustworthiness of privatizing SS security per se, and in fact points out that there is no trustworthiness, only accidents of timing.
I come away from this article thinking that if we had privatized SS a few years ago we’d be calling this a near miss and reconsidering.
CC has a good point.
But more broadly, I still don’t understand why young people are not allowed to opt out of SS completely, if they want to. Give them a packet of info (spelling out the risks and benefits of opt-out) upon starting their first full-time job, and if they choose to opt out, they have 1 year to change their mind - but after that year, they are barred from Soc Security. No pay-in, no payout to them on retirement.
What they do with their money is up to them.
The problem with what you’re suggesting is that the money we contribute to SS today isn’t kept/invested for our retirement; it’s used to pay for the retirees of today. This is a basic flaw from when the system first started and has just never been changed.
What would happen if we suddenly changed it? Someone would have to take the financial hit. Either the government would assume the debt, which means we would all pay for it as tax payers, or the retirees (or those close to retiring) wouldn’t get their benefits, which they believe they’ve paid for (even though they paid for the previous generation).
Nope, more than likely we’d have to assume the debt as a nation. Basically, a bailout for the SS administration. I’m OK with that, tho, as long as it means that Congress will no longer be able to dip into the SS funds and I could actively manage my own portfolio. As CC said, someone will have to decide on what choices we’ll have, and someone is going to make money off the management fees for these accounts. Since it will be so many accounts, I don’t see why we couldn’t reach an agreement with several companies (don’t want just one in case of another meltdown or bankruptcy) to charge fees of less than .75%, tho.
Basically, we could run SS like a 401(k) or a Thrift Savings Plan for those currently in government (their version of a 401(k))
Radleys chart is NOT inflation adjusted. I am forever seeing people compare raw stock charts with inflation adjusted SS numbers and crowing about the difference, but this is false and it comes from people smart enough to know better which makes me believe they are being deliberatly misleading.
Here is the chart of the Dow adjusted for inflation. In 1930 it was 100, lately it is about 1000. Over 80 years that is a return of just under 3%. Now discount that 3% by the cost of the above mentioned insurance benefits of SS, and the risk factor (people would move money out of stocks into T-bills and CD’s as they approach retirement) and you find that SS returns (1.5%) and private account returns (after inflation) are a wash.
Forgot the link:
http://www.dogsofthedow.com/dow1925cpilog.htm
Jim –
No, and that’s a fair point that I didn’t make clear. The Cato projections were based on the 12.4 percent contribution each paycheck over time.
There’s nothing magical about 30 years. I guess ideally, it should be 40 to 45, or even 50 for today’s workers. But the longer the time period, the greater return on your investment because of compound interest, and the less likely you are to be screwed by a short-term bear market hitting just as you retire.
I just checked my 401(K), and while I’ve lost a good chunk of it over the last year, my total growth is still 6-7 percent, even after yesterday’s tumble. And I only started it 8 years ago.
Good for you. I started my 401(k) 2.5 years ago and I’ve actually lost 8.72%. I have almost 9% less money in the account than what I’ve contributed into it.
My Roth-IRA, however, is up 6.68% overall, but down 27.71% for the year (that’s a huge chunk to lose, even if I’m still “up”).
Radley,
I agree SS is a likely total loss for those of us under 30 and probably under 40 as well. If I could stop paying in today with no hopes of claiming my 10 years worth of payment I would in a second. I’ve heard this from others too. The basic problem is not being able to opt out, which would still be a problem under the privatized plan, except what is called a privatized plan now becomes a government managed stock market. Even with the ability to choose the investment it is inevitable that the likes of GE, HD, and MS will eventually be made up of SS stock investments. The too big to fail argument then gains even more steam, where the government finds it necessary to take over these companies and nationalize them in an effort to save the working class’ SS investments. The problem is this ISN’T privatization without the ability to opt out. We’re already seeing the problems with quasi-privatization and quasi-deregulation.
Another problem with social security is that as government takes a larger proportion of employment, that means a smaller proportion paying into social security.
Nope, more than likely we’d have to assume the debt as a nation. Basically, a bailout for the SS administration.
Won’t ever happen. The m.o. is to futher define/complicate reasons NOT to pay the obligations. That’s what all the “means testing” arguments are about. The standard argument is “Bill Gates won’t need a lousy 1.3K per month” and while true, it ignores the fact that Gates would probably donate that money anyway. Nothing like stealing money from charities. Social Security is living proof that the U.S. repudiates its debts little by little.
People are also forgetting the Dow has a survivor’s bias in it. The Dow from 30 years ago isn’t the same as the one from today. Nor is the Dow from 5 or even 2 years ago.
They kick out failing companies all the time, and they add in strong ones.
Where would the Dow be if they had left in AIG after it crashed or if they had left in the company AIG replaced in the Dow a couple of years ago?
The Dow is a horrible indicator to use for the overall market movements unless we are going to restrict the SS funds to a Dow follower that always gets to swap out stocks of the de-averaged companies for their stronger replacement without having to pay the difference in price.
I.e. The shares of AIG I had owned right before it was replaced by Kraft wouldn’t have been enough to buy a comparable number of Kraft shares since one of the reasons AIG was being removed was because it’s price had fallen so low, and the reason Kraft was being added was because it was higher and stronger.
I have no doubt that you’ll get every dime of money that’s being promised to you by Social Security. What they can’t promise you, however, is your purchasing power.
So you’ll get your 1,000 bucks a month or whatever it is, but that might only buy you a loaf of bread or gallon of milk. Maybe a pair of shoes, if you’re lucky.
“The problem with what you’re suggesting is that the money we contribute to SS today isn’t kept/invested for our retirement; it’s used to pay for the retirees of today. This is a basic flaw from when the system first started and has just never been changed.”
The problem with this fork here is that it’s only got a single tine, and it’s broad and flat. This is a basic flaw from when this fork was designed and it’s just never been changed.
“Sir, that’s a knife.”
It’s not a bug that current social security taxes are paid out to current retirees–that’s a feature. And it’s easily recognized as such once you start looking at social security as what it is: An insurance program, not a personal retirement account.
Why complain that current contributions go to current retirees? You might just as well complain that the premiums you pay on your car insurance are paying current claims, rather than being placed in a special account with your name on it, against your own future claims.
Some people who work a long time and die shortly before retirement and never see a penny of what they paid. Another guy dies the day after he collects his very first paycheck, and his infant daughter collects benefits until she turns 18.
If you think a knife is just a poorly-designed fork, both these cases will leave you shaking your head at the unfairness of it all. But that’s how insurance works: Some people pay more in premiums than they collect in claims, and others pay less.
The m.o. is to futher define/complicate reasons NOT to pay the obligations. That’s what all the “means testing” arguments are about. The standard argument is “Bill Gates won’t need a lousy 1.3K per month” and while true, it ignores the fact that Gates would probably donate that money anyway. Nothing like stealing money from charities. Social Security is living proof that the U.S. repudiates its debts little by little.
Have you noticed that “means testing” generally comes from people hostile to Social Security in the first place, and it generally opposed by Liberals who you’d normally expect to favor that sort of thing?
The reason is that “means testing” is an attack on the popularity of the Social Security system, and this is well understood by most of the people involved in these fights. Social Security is popular not just because it works, but because nearly everyone has family members who collect it. This makes the program nigh-invulnerable to political sabotage. In order to make it vulnerable, it first has to be transformed into a welfare program. Narrowing the payouts narrows the program’s constituency. Once you can convince white people that the program mostly works for the benefit of brown people, it’s doomed.
And it’s easily recognized as such once you start looking at social security as what it is: An insurance program, not a personal retirement account.
Show me the contract I signed stating that I wanted to be part of this insurance program. Oh wait, I found it right here: “Employee Contract”.
I will take care of myself. Thanks, but no thanks. Show me how to opt out of Social Security and I will do it in a second. If it turns out years from now that I’m 70 and penniless, tough shit. Part of freedom is being free to make bad choices.
We need social security because most people are morons. The government isn’t going to let old people starve, so the intelligent would end up subsidizing the morons anyway. I bet a lot of people would “invest” the money, in their retirement accounts, in lottery tickets, if that were an option.
adam, i like your reasoning.
if the government doesn’t help people, then it will eventually have to help people. therefore, the government should help people.
flawless.
Most insurance companies pay today’s claims largely with today’s premiums, because there won’t be many claims by people who have stopped paying premiums for a year or more. There may be some (e.g. someone who gets sued for an accident 18 months ago would be covered by the liability insurance in effect at the time of the accident) but not a lot. By contrast, Social Security is supposed to pay people for decades after they stop paying into it.
In reality it’s a Ponzi scheme. That’s all there is to it.
The stock market, however, is not really a good alternative. The problem with the stock market is that there can be substantial market friction if there is an imbalance between the inflow and outflow of capital. It’s a little hard to imagine it with stocks, but it’s much clearer if one substitutes a ‘hard’ asset:
Imagine that instead of putting their retirement investments in stocks, people put it in zinc. During times when the amount of zinc bought for retirement investments was greater than the amount of “retirement” zinc being cashed in, prices would be higher than if it wasn’t used as a store of retirement wealth. Conversely, during times when the amounts being cashed in were greater than the amounts being invested, prices would be lower.
In other words, the synchronized demand for zinc creates a situation of ‘buy high sell low’. Even if zinc were to increase in fundamental value between investment and cash-out, that increase would be offset by the market friction that increased the ‘buy’ price and reduced the ’sell’ price.
One interesting aspect of market behavior is that market friction when people are buying something for investment is mistakenly regarded as a good thing. When people start to buy zinc for investment and the price goes up, the increase in prices is taken as a sign that it’s a good investment. The more the price goes up, the better the investment. In reality, the reverse is true. As the price of zinc goes higher during the ‘buying’ times, each dollar buys less real worth of zinc. The increasing prices make it looks as though people are turning a profit, but when people start trying to collect their paper profits, they’ll rapidly disappear.
The same problems of market friction occur with stocks as can occur with hard assets; in some cases even moreso. With something like zinc, one can have a sense of a certain fundamental value. A pound of zinc isn’t worth $10,000 no matter how crazy people may have gone in the marketplace. By contrast, investors are far more likely to view the price of a stock as an indication of its worth; if they see that the price of a stock has been skyrocketing and is at $100 today, they’ll figure the stock may be worth $110 tomorrow. If in fact the most optimistic plausible estimated revenue stream for the stock has a present cash value of $50, then unless tomorrow’s estimates of the revenue stream are higher than today’s, the stock won’t be worth $110 tomorrow. It won’t even be worth $100. It will really be worth $50.
It was reported yesterday that 401k’s lost TWO TRILLION DOLLARS in value in the last 16 months? 401’s are as close to privatizing retirement money as you can get…..don’t sond like a wise way to go to me.