Tuesday, January 13, 2009

Fact-checking Allan Sloan on Social Security

Allan Sloan writes in today's Washington Post that current market conditions show how bad an idea Social Security accounts would have been. Here's a sample:

If your year-end 401(k) statement made you ill, I have one consolation for you: It could be worse. How's that possible, given how horrible last year was for investors?

Simple. If you're not close to retirement, you've got time to recover. If you're in the retirement-age zone, as I am (I'm 64), at least you've got the option of hanging on until things get better. If you're in the mandatory-withdrawal part of life (older than 70 1/2 ) or just need some retirement cash, you can take a minimal distribution this year and hope for the best.

If, however, you were forced to buy a lifetime annuity with your current balance -- when you buy such an annuity, you trade your cash for a series of guaranteed payments for the rest of your life -- you'd be making your loss permanent. That's how things could be worse.

That is what could have happened to many people under President Bush's proposed Social Security privatization program. It would have required people of modest and very modest means who invested their Social Security taxes in the market to turn some or all of those accounts into annuities when they hit retirement age. (Yes, Bush never proposed a specific plan, but annuitizing private accounts for some people is what his 2001 Social Security privatization commission proposed.)

A couple points:

  • First, as I showed in this paper, people retiring under current market conditions actually wouldn't have done all that badly. Assuming a plan similar to President Bush's, the typical worker's total Social Security benefit would have increased by around 15 percent. While Sloan's anecdotal evidence is compelling, in doing this paper I found that you really need to run the numbers.
  • Second, Sloan says that people would be "forced to buy a lifetime annuity" with their personal account balances, thereby locking in the poor returns of the past few years. Um, except that they wouldn't. Both the 2001 Social Security reform commission and President Bush's reform proposal allowed for scheduled withdrawals instead of immediate annuitization.
  • Third, Sloan later says that the Bush plan would "force people to depend on the markets for money to meet basic needs." Again, except it wouldn't: no one under the Bush proposal (or most other account plans, for that matter) would be forced to take a personal account, and no one holding an account would be forced to invest even a penny in the stock market.

Allan Sloan's stuff is usually quite interesting, but this is a bit sloppy on the facts.

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