Monday, April 18, 2005

Hix in stix nix Social Security investment mix

It’s rare to find a more condescending and tendentious article than this one in today’s WashPost: “Bush Social Security Plan Proves Tough Sell Among Working Poor.” Bottom line: because a handful of lower-income workers don’t understand Social Security reform and simply refuse to take responsibility for their long-term financial security, we’re all stuck with a compulsory program careening towards insolvency.

"I don't know what's going on with it [retirement savings]," she said one night at a tax clinic in Southeast D.C. "I just know I have these three accounts, so I just say, 'Let's hope and pray. Let's hope and pray it's not going into Enron. Let's hope and pray it's not going into Tyco.' It's just hard to absorb all I'm supposed to absorb."
Said the woman studying to be an accountant. How would you like to have her preparing your taxes? “Let’s pray we don’t get audited.”

Nowhere in the article does reporter Jonathan Weisman disclose that any personal account program would be completely voluntary. Furthermore, there’s no mention that current proposals stipulate that any benefit cuts would be subjected to “progressive indexing” such that low-income workers would receive the full benefit as calculated under the current system. These are both highly relevant points omitted from the story in favor of a winding discourse about bus routes.

And, most critically, if there is no reform then automatic benefits cuts kick in when the mythical Trust Fund is exhausted. This point was not lost in the heated rebuttal from the Ankle-biting Pundits:

And if the Post was honest it would point out that she doesn't have to join the new system and she's still going to get her check. But that check is going to be a whole lot less if we stick with the old system.
I’ve been appalled at the self-serving rhetoric from groups like the AARP who appear to find virtue in keeping lower-income Americans in an endless cycle of dependency. Voluntary personal accounts, for all their flaws, offer the opportunity to build real equity that can be passed on to family members. But because some people “don’t want to think about it,” all Americans will remain chained to this Ponzi scheme.


Anonymous said...


I've been with you on SocSec reform from the start. But your comments blaming working class people for Bush's failure is tantamount to forming a circular firing squad.

Working class voters now form an essential bloc of the GOP coalition. Does anyone really think that without the socially conservative, blue collar rural types in the South ahd Midwest, the GOP would be anywhere near a majority in Congress or have the WH? The answer is a clear no. Working class voters once were reliable Democrats, during which time the Dems ruled for a generation. They began migrating to the GOP 25 years ago when Reagan began speaking to their issues: low taxes, cultural traditionalism, and getting tough on defense. And as Karl Rove will tell you, this past election was won by rural religious voters --- probably those same people who are too "lazy" to manage their own finances.

So Viking, if you insist on sounding like Archie Bunker, you are just asking for a return to the days when the GOP was the party of cranky old guys and country clubbers and everyone else was a Democrat. SocSec reform will only work if the poor and less educated are guaranteed a benefit at the end of the day and there are enough controls on the choices they'd have to make with their personal accts that they wouldn't have to worry about losing it all. People do want choice. But they also want their Social Security check. Get used to it.

Eric said...


Thanks for the comment. I have two responses:

First, I believe the poor in America are caught in a cycle which makes it extremely difficult to escape. For example, whereas most people have credit cards at a modest rate, lower-class Americans are forced to pay 18-20+% on credit cards. They pay rent instead of a mortgage. For this and other reasons, it becomes impossible for them to save. Why not set up a program that builds equity instead of a (tenuous) promise of future benefits? Why not educate these people in the story - especially the accountant - about the wonder of compound interest (as Einstein called it).

Second, if people are fiscally irresponsible, what is the liability to everybody else? Here is the great paradox of Social Security: we tell Americans they're not saavy enough to invest payroll taxes, but once they're 65, they can blow it all at Vegas. I understand the "shared responsibility" of Social Security but even the "greatest social program ever" can't continue to hike taxes on working Americans without end.

I'm not sure if that adequately answered your comments - you seem more in touch with demographic trends.

Oh, and I love "All in the Family" meathead.

Anonymous said...

LOL. Yeah, I have the "All in the Family" theme song on my computer. The lyrics are actually quite funny.

Anyway, back to SocSec. Compound interest is a wonderful thing, and I think most working class people know at least that much a la their bank accounts and such (though that accountant in the story really was disturbing). The reason we need a forced savings program for retirement is that the lower middle class and below just doesn't make "enough" money to put away, and so the state basically has to force them to save some of their income each paycheck. One solution would be to allow people to opt out of the system if they instead invest their money in the private sector, but you'd still have that base contingent of folks that would blow it all some way or other and end up with nothing.

So my point is, there are very few people who want to get rid of SocSec as a matter of constitutional principle. Most folks who want it changed realize that the system is insolvent and that, as Greenspan said recently, it will end up destroying our economy in the long run in its current incarnation. The logical response is a forced retirement acct that makes sense, similar to the Bush plan.

Bush went wrong on two counts. The first is he assumed that we're all as savvy as he is when it comes to money. Tell that to my parents --- working class Reagan Democrats in the midwest who wouldn't know what to do with their own SocSec funds each week. They'd end up spending half of it on brokerage fees and end up with no greater returns than the current system. I, on the other hand, as a white collar yuppie (I hate that word) would love to get my hands on my SocSec funds and learn all about how to invest them.

The next logical step is a plan to make private investment optional. But then you still have the problem of people doing stupid things with their money and ending up broke at retirement. Really, the only way to allow people to have a greater return while preventing stupidity is to give them such a limited, conservative choice that they just can't screw it up. Even the most conservative fund would yield a higher return than the current bond market in which SocSec is invested.

The other mistake Bush made was his insistence that private accts would solve the problem without explaining that we'd have to make some tough choices to get from a Ponzi Scheme to a government run IRA. Raising the retirement age should have been the first and most obvious sacrifice. Gen-Xers like me don't plan to retire at 65. Heck, we don't even think we'll see SocSec. Raise the age to 70 for young people. Then, raise the tax cap a few thousand bucks. It's not going to kill anyone. But no more debt. We've got too much already, and debt is once again becoming more politically unpopular than tax hikes, sort of like it was when Perot ran in the 90s.

Basically, what most Americans want, IMHO, is a mandatory retirement savings program that yields them a good return and that they know will be there for them. That's why they don't want the current Ponzi scheme, and that's also why they want a guaranteed benefit so that the next Enron doesn't swallow anyone's SocSec funds. Yes, it's sort of a free market welfare state. But that's what Bush's 2000 slogans like "compassionate conservatism" or "prosperity with a purpose" translate to in the long run.

Eric said...


I don't really disagree with anything you've said here. If you've been reading my blog, you'd see that I've been ambivalent about personal accounts: even though I think they are a way to generate equity, I'm greatly bothered by even *more* debt. Plus, as you note, Bush made a tactical error by suggesting they would help SS solvency.

But we simply cannot continue to raise payroll taxes which are now the largest tax for 80% of Americans. So what's left? Raising the retirement age and paring back on benefits and nobody wants to hear that.

But there's a certain urgency to Social Security that cannot be denied. Small changes made now will allow for adjustment and planning over decades. Waiting until the Trust Fund starts to cash in bonds is inviting disaster.