Thursday, March 31, 2005

Demagoguing Social Security: Have they no shame?

Old Lady: This is terrible, Frank. When President Bush and his Wall Street pals privatized social security, they never told us we could actually LOSE our money.

Old Man: Please don’t cry, honey, but that’s the stock market for you. It goes up, but now that we need the money, it’s down.

Old Lady: Well, how much of our social security have we lost in the market?

Old Man: I can’t even think about it. I can’t believe that this is what privatization did to social security. Instead of guaranteed benefits, now we’ve got this mess. Social INSECURITY.

True Majority Action Radio Ad, currently being run by you know who [Emphasis in the Original].
The above is a current radio ad being run by those who oppose individuals having any control over how a portion of their social security funds are invested. They suggest doom and gloom will flow from the slightest bit of economic freedom. Too bad the FTC isn’t active when we have a real instance of deceptive advertising—indeed, a deception which is much more egregious than anything coming out of the corporate sector.

But, do these people who are so fearful of personal social security retirement accounts also oppose 401 (k) retirements accounts? I have not heard that, nor have I seen similar ads talking about how people have been or will be “wiped out,” due to 401 (k)s.

401 (k) accounts are, as most who will read this know, personal retirement accounts that individuals can use to place income received from employers into. The contributions by employees are often matched, up to a certain level, by employers [as is the case with social security]—without the contributions being taxed until withdrawn—which, in large part, is on retirement.

The 401 (k) accounts carry legal restrictions as to how the funds can be invested, and it is contemplated that the personal retirement social security accounts would have even greater legal restrictions on how those funds could be invested, with the idea in mind of constraining the riskiness of the portfolio.

For large numbers of, if not most, people, 401 (k) accounts are a more significant component of their retirement plans than social security. Yet seldom do you hear Democrats [the leading opposition force to personal retirement accounts] or others argue for the elimination of 401 (k)s because they permit individuals to have more risk in their retirement investment portfolios than they should. Why the inconsistency?

Indeed, why don’t we see ads, similar to the above, imploring the federal government to remove 401 (k)s as an investment opportunity for the citizens of America? The answer is that we already have these accounts; people generally know how well they work— so it is harder to fabricate falsehoods about them.

Are there folks out there who really think that over a thirty year period, or so, an investment in well diversified funds indexed to track the broad contours of the market at large, which could easily be the legal constraint for the personal social security retirement accounts, is likely to ever leave the individual investor impoverished, as the above tearful ad suggests? Because if our economy is such that that could happen, we will surely not be able to meet our social security obligations under the current finance as you go, Ponzi scheme, social security system, unless you envision raising social security payroll taxes on those lucky enough to be employed when the country is facing 25% unemployment. And, even the most ardent pro-taxers don’t suggest doing that.

In short, over the last 75 years, we have had one very significant contraction in the economy [depression, if you like, in 1929 and into the 1930s ] and a number of much less significant downturns in the economy. If we have another very significant economic contraction, as in the 1930s, those who are set to retire after the contraction hits will have problems under either retirement plan—personal retirement accounts or the current system.

And, it is more likely, if someone has a non-neglible, but not high, probability, of retiring during a downturn, but not a depression, that the individual’s retirement portfolio will have a much greater value from having, say, 26 years of fairly high returns and four years of losses, then 30 years of putting their money under the mattress, which is pretty much the current system.

So, cheer up old lady and old man, the market may have gone down for a year or two or three, but you are way ahead with your 4 per cent per year average rate of return personal retirement accounts than with the government’s equivalent to a 1.3 per cent per year average rate of return for its social security recipients under the current system. It is a matter of good economics and simple compounding. Do the math.
Jeff Berkowitz, Host and Producer of Public Affairs and an Executive Recruiter doing Legal Search, can be reached at