MYTH: Social Security is an investment

It's time for Mr. Bush to start putting the Democrats on the defensive by asking why they are willing to let workers pour so much into a retirement system that yields so little when they retire, if they live that long. Why do they oppose letting younger workers voluntarily build a little more wealth for their old age? Who today would invest in an IRA or 401(k) plan whose average yield is less than 2 percent? (Donald Lambro, "Handy fix ... to rescue reform," Washington Times, 3/17/05)

REALITY

Privateers love to point at the supposed "return" on Social Security, but that is an uninformative index, for two reasons.

First, Social Security is insurance -- insurance against economic risk. It is a fact of life that you might just live a long time, that you might become disabled, and that your savings and investments might run out or collapse. If you are fortunate in your able years, then Social Security will only be a small part of your retirement income -- a "bad investment." But you can only make that judgment after the fact. You pay into Social Security, like any insurance premium, because you don't know before the fact, and you want to eliminate the risk of having no money when you are old:

This is tantamount to paying for insurance and then not needing it. This happens all the time -- every year someone fails to get sick or injured and, while surely happy in their good health, would have been better off not buying insurance. That's the nature of insurance: if you don't need it, then you'll always wish you hadn't purchased it. Only in the context of retirement insurance is this considered a crisis.

On the other hand, those with bad luck or insufficient income will not have a nest egg at retirement. Because of Social Security, instead of facing the risk of zero income at retirement, they are guaranteed income sufficient to subsist. This is precisely like the insurance example I worked through above: people with good outcomes will wish they hadn't paid into the insurance fund; those with bad outcomes will be glad they did. Ex-ante, everyone benefits from the insurance. Overall, society is better off because risk is reduced; because people are risk-averse, the gains are quite large. (Angry Bear, "Social Security: insurance risks and premiums," 12/30/04)

Second -- and this may come as a shock to market worshippers -- money doesn't come from nowhere. Stocks are not magic money-trees. The return from riskier investments is simply payment for the risk. If the risk wasn't there, there wouldn't be any profit.

MYTH: In Bush plan, life-cycle accounts will guarantee wealth

By now you’re probably wondering what the heck these “life-cycle accounts” are. If you are like most people, you haven’t heard a lot about them in the Social Security debate. Indeed, they play a bit part in this great drama. They are not, as Weisman calls them, “Bush’s ‘default’ investment option.... The White House has talked about life-cycle accounts in a general way, but it has never defined in detail how they would be designed. So Shiller’s “disastrous” simulated investment performance is for a strategy that he himself made up . And as you’ll see in a moment, he cheated.

... Shiller says his simulated life-cycle portfolios were “designed to capture the President’s proposal.” Yet all of his simulations are based on hypothetical life-cycle accounts in which half the bond allocation is, in fact, arbitrarily devoted to money market assets.... Then, to make life cycle accounts look even more “disastrous,” Shiller uses historical returns that are far less than those actually achieved by the investments he is simulating. Instead of using returns from U.S. markets, he uses returns from an average of 15 countries. (Donald Luskin, "Life cycle workout," National Review Financial, 3/22/05)

REALITY

In fact, as the infamous "senior administration official" explained quite explicitly before the state-of-the-union address, the "life-cycle" option -- to move to safer investments as the worker approaches retirement -- is the default:

The life cycle fund would simply be another choice that's made available to participants in the Social Security personal accounts. For those workers who are nearing retirement, it would be offered as the standard choice. If people didn't make a choice to the contrary, they would be -- their standard selection would be deemed to be this life cycle fund. Individuals would have the opportunity to increase their amount of investments in other instruments beyond what is available in the life cycle fund, if they chose. However, they would have to sign some forms and get the sign-off of their spouse, if any, to show that they're aware of the implications of having a different investment mix that close to retirement. (Senior administration official, 2/3/05)

As for the paper Luskin "critiques" (available here, and discussed in this Washington Post article), the author, Yale economist Robert Shiller, actually uses two models for growth: one based on U.S returns since 1874, and the second based on the international market in the last century. The former is closer to the Social Security actuaries' projections for stock market returns, and the latter is closer to leading economists' and bankers' predictions based on a recent Wall Street Journal survey. Mr. Luskin simply failed to read the paper -- even the two separate tables of results.

Luskin also failed to read that Dr. Shiller compared six different asset allocations -- various levels of "life cycle" shifts, or 100% stock investment, or just bonds. Luskin picks one -- half bonds, half "money market assets" -- that isn't a "life cycle" account. This is also quite easy to see -- they are listed as separate columns in the two tables. We can only conclude that Donald Luskin, a "contributing editor" at the National Review Financial, is completely illiterate. It is simply amazing that he is able to type out his own articles, without the basic skills necessary to read them.

But Luskin did us the favor of pointing out a very interesting paper. While Bush and Cheney roam the country, reassuring wary Republicans that they will be protected from retiring at the bottom of a business cycle thanks to this "life cycle" option, they never really explain how that affects their plan.

As we have noted here, the Bush plan diverts money from the traditional Social Security system into these personal accounts, and in order to get some of that back, the worker faces an "offset" -- upon retirement, their traditional benefits (annuitized, to make it more complicated) are reduced based on the amount they put into the private account plus inflation, plus 3% compounded interest. This clawback can actually exceed the amount of the private investment, leaving the worker (now retiree) with less money than if he or she had stayed in the old system and Bush hadn't mucked it up in the first place.

What Shiller describes is what happens to those who opt for the "life-cycle" -- the default -- when it comes time to pay the clawback. It turns out a significant portion of investors will lose money. Of those who are average earners (not even considering the poor!), anywhere from 32% (using historical U.S. returns, the optimistic model) to 71% (using international returns, the pessimistic model) will lose money on Bush's private accounts.

Shiller makes the point that if we have to pay the government back for all the money we diverted to these private accounts, then they are simply loans, at a 3% real interest rate, and Bush is telling us to invest these loans "on margin." (So much for "ownership.") His advice to those shopping around in Bush's plan: if you have enough personal savings, take the PRA and invest it all in the stock market -- there is risk there, but you will probably do better than the magic 3%. But if you don't have any other nest egg, you shouldn't risk going all in the stock market, and all the other PRA options are losing. So stay with traditional Social Security.

Conclusion: Bush's plan offers regulated stock-market investment to those who can already afford it, and an opportunity to lose their shirt to those who can't.

MYTH: Social Security is slavery

Am I pushing the envelope too far to suggest that there is common ground between the politics of slavery and the politics of Social Security? (Star Parker, 2/15/05)

The NAACP was once at the vanguard of the civil-rights movement. That movement began because blacks wanted freedom. Yet blacks hear today from their leaders that they are incapable of being free, that they are incapable of taking care of themselves and their families, and that staying on the government dole is the only answer for them. (Star Parker, 3/8/05)

The owner/masters of today's Democratic plantation reject all attempts to roll back government and give working Americans more choice and freedom. The response is the same whether it's personal retirement accounts or choosing where to send your kid to school. Anything reducing government control gets rejected.

... Social Security reform, with a crucial central component of personal retirement accounts, is being threatened by elitist Democratic liberals. They preside over a government plantation over which they do not want to relinquish control. It's time to let the slaves free. Transforming taxes into ownership is an important way to do it. (Star Parker, "Social Security reform threatened by elitist liberals," Town Hall, 3/22/05)

REALITY

We are including two previous quotations from Star Parker to illustrate this sad, sad point. We understand that a crucial part of making a political argument is constructing an effective narrative, but she has simply gone over the deep end. We would say she was in over her head, if not for the fact that she has made an industry out of this hamhanded analogy, including a book called Uncle Sam's Plantation.

Does she really think that Social Security, an insurance system which pays modest pensions to all workers who pay into it, is the same as slavery, a practice in which humans were equated with property, and which caused incalculable injury and death to millions of people of African descent in the last few hundred years, in addition to creating a racial caste system in America which lingers today? Does she think they are morally comparable?

It's not merely a lack of perspective. The view among free-market conservatives that the two iron laws of morality and society are low taxes and trading on the stock market is an example of a lack of perspective, in particular because it ignores the history and condition of the breadth of society. Ms. Parker, on the other hand, makes careful note of this history, and uses it as a backdrop for her inflammatory rhetoric. That is a warped perspective.

If her faith-based political theory is that American can achieve equality and eliminate poverty by making everybody a miniature tycoon, then so be it -- she won't be the only Everyone-a-Millionaire Republican. She can try, and fail, to show how Bush's "personal retirement accounts" make this utopia happen. With the low standards we have these days, that would qualify as reasonable advocacy.

But government is not a "plantation," Democrats are not "owners/masters" (what irony!), and Social Security is not slavery. Those brave, brave Privateers -- the Charles Schwabs, the Clubs for Growth, and all the other two-bit hustlers -- they are not abolitionists. A multi-trillion-dollar scheme to shift risk from the pool of all workers to the pool of one retiree is no Emancipation Proclamation -- it's not even a multiplication table. And George W. Bush, who plays the role of a used-car salesman in this farce, is no Abraham Lincoln, no matter which aircraft carrier he lands on.