Saturday, September 20, 2008

And another thing (or three) on Social Security

Every time the stock market takes a steep dive, the usual suspects come out and cry: "Aha! See what privatization would have done!" It's akin to leaving a football game after your team gives up a touchdown in the first quarter. Social Security is a lifetime investment and must be gauged to long-term projections.

First of all, the personal Social Security accounts that were proposed would have diverted only a small percentage of FICA taxes (2% of the 12.4% was often cited) and would have put them into accounts holding Treasury bills. Essentially, they would be the same as current accounts except, if a person died before 65, he/she could pass that money on to survivors.

Second point: let's assume that personal accounts would allow for "risky" investments in stocks. Since 1926, 28% of one-year periods have logged a drop in the stock market, and 13% over a five year period. But over 15-years there has been no decline in value in a stock portfolio. If we account for a mixture of stocks and bonds: 23% experience a loss over one year, and 6% over five-years, but 100% of mixed portfolios gained in value over ten years. For a 60/40 stock/bond portfolio, the 35-year return is an average of 5.1% and the lowest return is 2%. By comparison, Social Security's rate of return for a two-income family with two children is 1.23% and for many people it is actually negative. (Needless to say, when Social Security goes bankrupt in 2041, the rate of return will be negative for everybody.)

Third point: Social Security once collected 1% of a worker's income and now collects 6.2% (with employee match that could go towards your salary, 12.4%). Retirement savings and investments are no longer the playground of the wealthy, as they were in the 1930s; people are free to make their own choices. Instead, the nanny state has decided to take these choices out of the hands of Americans and give us back (after 50 years of working) what we paid in. As I've said before: Social Security is so great, they had to make it mandatory.

4 comments:

Anonymous said...

First of all, the personal Social Security accounts that were proposed would have diverted only a small percentage of FICA taxes (2% of the 12.4% was often cited).

Wow! Just 2%, you say? Sounds great! What could go wrong?

Third point: Social Security once collected 1% of a worker's income and now collects 6.2% (with employee match that could go towards your salary, 12.4%).

Eric said...

I genuinely don't get your point. Are those two supposed to counterbalance in some way?

Anonymous said...

The point seems straightforward enough. If the original Social Security deduction percentage was increased later, then so could the percentage taken out for stock accounts.

It's hard to tout the stability of the "small percentage" that would be diverted to personal accounts, while simultaneously denouncing the historic volatility of the deduction. Especially now, when "the nanny state" is buying up major Wall Street interests.

Eric said...

Oh, OK. Well, let me offer this rejoinder:

If, say, the Republicans offered to raise FICA taxes by 5% to shore up Social Security's finances, but asked that 2% of that be diverted to personal accounts, I'd wager that the Democrats would still refuse that deal.

It's all about keeping cash in the hands of Washington. Open that floodgate of private savings (you know, "freedom") and people are going to want more.