Dark Bilious Vapors

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Home » Archives » December 2004 » They tout the reward, but they never tell us about the risk

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12/13/2004: They tout the reward, but they never tell us about the risk

Lately, I've been reading (not much, just a few 'graphs here and there) about how Dumbya wants to "privatize" some of the Social Security fund. Supposedly the idea is that if we give some of the money collected by the system to the people, they can invest it and see higher returns from that investment. I forget the exact details, but IIRC the Social Security payroll tax is invested in Treasury bonds paying around 3 percent or so--one of the lowest paying investments you can get.

However, when the Bushies tout the "greater returns" line, they forget to remind us of something. There's a very clear, almost iron-clad rule of investment: The higher the return, the higher the risk.

Social Security investments make such a low rate of return for a reason; as pointed out in many places, Social Security represents a guaranteed stream of income for one's retirement. In order to guarantee a return on your investment, you're going to accept (nay, you are going to have to accept), a much lower return on that investment.

Conversely, if that investment is supposedly going to return over 100% of your initial investment in the first six months, that should clue you in that there's a high order of probability that your initial investment is going to go bye-bye, and you're not going to see that money again. May as well toss it into the river--or better yet, go out on the street and give it away to the homeless, at least then it will be in the hands of some deserving recipients.

The thing that really steams me about the selling of Bush's "ownership society" is that everything I've seen from the administration is selling this on the "greater returns" point. "Hey," they say, "you can do a much better job of investing your money than the silly ol' gubmint can." This in spite of the fact that there's significant evidence out there that institutional investors get much better returns on their investiments than individuals do; individuals are too close to the investment decisions they make, and are much more likely to stick out bad decisions when they should bail on them (and oftentimes make other bad decisions when they do decide to bail). And that's the problem; the idea of privatizing Social Security makes about as much sense (and this analogy is a lot closer to the scam that the Bushies are trying to push on us) as telling people to save the premiums they pay for insurance and instead, to blow them all on lottery tickets.

Yes, the return is higher, but how much "return" do you really think you'll see on that "investment"?

Yes, I know I'm risk averse, but I'll opt for the guaranteed income, thanks. I know it's not much, but at least I can rely on it.

Thanks to Bryan at Why Now? for inspiring this flight of fancy; he's not to be held responsible for the way I've botched any of it, however. :-)

UPDATE: Aaron at The Stopped Clock has a few good comments relative to this topic as well:

I'm not at all against investment in the market, nor in government support for retirement investment - to the maximum extent possible I take full advantage of my ability to save through IRA's. And despite the market's woes over the past few years, I continue to do so. So obviously I'm not one of Brooks' mythic people who opposes this faux "reform" because I am "instinctively" suspicious of the market. It is because I am sufficiently knowledgeable of the market, and of pork barrel politics, government budgeting and long-term financial projections, to be inherently skeptical of this type of "privatization".

If the Bush Administration wants more working people to invest in the market, create a sweeter deal for the working poor to invest or save through regular and Roth IRA's, while working to maintain Social Security as a safety net for retirement. As previously noted, an adjustment to payroll taxes (applying them to higher income brackets while maintaining present rates) is an easy fix. If you don't want to "save" Social Security by raising taxes, implement a
meaningful reform, such as by moving away from the nonsensical suggestion that it is a savings program and acknowledging it as a social welfare program with proceeds that should be distributed on a means-tested basis. Oh... but either one of those reforms would mean either raising taxes on the rich right now, or reducing their (unneeded) Social Security benefits in the future. So why would the Bush Administration choose such an option, when it can instead put the fiscal thumbscrews to the working classes.

Len on 12.13.04 @ 09:39 AM CST


Replies: 2 comments

on Monday, December 13th, 2004 at 12:59 PM CST, A. Rickey said

So explain to me again how your "investment" is "guaranteed"? If Congress decided to slash benefits tomorrow (or raise Social Security contributions while leaving benefits steady), your rate of return falls. (This, of course, saying that Social Security is an investment, which it's not--you have no personal right to any bit of the trust fund.)

The trouble is the accounting: given the boomer's retirement, either a reduction in benefits, an increase in taxes, or a raised retirement age seems inevitable. So we're pretty much looking at a decrease in prospective returns from any Social Security "investment" that there is. And I'm not at all convinced that our investment is guaranteed.

on Monday, December 13th, 2004 at 8:01 PM CST, Len Cleavelin said

Ok. Point well taken. As I'm understanding it, the income stream is, if not guaranteed *once one qualifies for the entitlement*, about as close as one can get to guaranteed this side of the grave. Which means that I suppose Congress could even slash benefits for those who've qualified for the "entitlement" (though that raises a separate question of how politically feasible that is, given what political power retirees as a bloc can summon up).

Given that Social Security is, as I understand it, a social insurance program, I don't seen that the basic analogy (taking one's insurance premiums and gambling with them) is invalidated. So what am I missing there?

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