Monday, October 27, 2008

Marketwatch: “Fiscal crisis not a death knell for privatizing Social Security”

Christopher Plummer writes for Marketwatch that the current financial crisis has not put an end to the talk of personal accounts for Social Security. A variety of analysts are quoted, both pro and con, but all seem to agree that the argument over Social Security and personal accounts isn't finished.

I've made a seemingly similar argument here, that current market returns don't imply that personal accounts would have been a bad deal for most workers. In fact, despite recent down turns, workers holding accounts over a full working lifetime would have all done very well. That said, I don't think market returns have been the biggest obstacle to implementing Social Security accounts. The "transition costs" associated with accounts are a bigger burden; if they're paid, they imply a "double tax" on transition generations. If they're not paid, then accounts really amount to a shuffling of paper assets around, but no real change in the pot of retirement income available for future seniors.

One unrelated point: the Economic Policy Institute's Ross Eisenbrey, who opposes personal accounts for Social Security, says:

"Nobel Prize winners in economics have admitted mismanaging their own 401(k) accounts; the third of retirees whose only income is Social Security can't afford that risk."

Ok. But what exactly were the mistakes those Nobel Prize winners made? Harry Markowitz, developer of modern portfolio theory which shows how diversification can boost returns without increasing risk, said, "In retrospect, it would have been better to have been more in stocks when I was younger." Another poor investor was 2001 winner George A. Akerlof, who kept all his retirement savings in a money market fund. "I know it's utterly stupid," Akerloff said. The point here is that the main mistake these Nobel Prize winning economists made was not investing enough in equities. Yet Eisenbrey's preferred policy would ensure that low-income workers, who have no retirement savings other than Social Security, would make the same mistake. Thanks, Ross!

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