There is one statement in Elliot Spitzer's Slate.com article on Social Security personal accounts that I fully agree with: "'We told you so' is just about the most annoying sentence one can utter." Sure is. Beyond that, though, Spitzer's argument that stock market declines over the past year just prove the foolishness of individual investing is pretty flaccid stuff. Spitzer begins by simply highlighting that "Since Jan. 1, 2005, the year President Bush proposed the idea, the Dow Jones industrial average has dropped from 10,783 to around 8,000, a drop of more than 25 percent." Ok, but in the Bush plan older workers accounts would automatically switch to bonds beginning at age 55, meaning that most people retiring today would have had much less exposure to that falling market than younger workers. Then Spitzer says that he will quantify the losses to today's retirees, "abeit roughly." Spitzer should have said albeit very roughly, since Spitzer relies for his numbers on a Fortune article by Allan Sloan that Sloan himself later retracted due to technical misunderstandings of how personal account plans would have worked. In this recent post, I gave the results of a much more detailed simulation of personal accounts using historical market returns. The short story is that there is no historical period in which a worker holding an account for a full career would have failed to significantly increase his total Social Security benefits, including workers retiring today. Moreover, even workers who held an account for only a few years before retiring under today's market conditions would have experienced only tiny declines in total Social Security benefits. Finally, Spitzer says, "as Paul Krugman has pointed out, the would-be privatizers make incredible—even impossible—assumptions about the likely performance of the market to justify their claim that private accounts would outdo the current system." The basic argument here is that as a slow-growing workforce reduces long-term GDP growth, stock returns must be lower as well. But here's the problem: first, it's not the "privatizers" who make assumptions regarding future stock returns, it's the non-partisan actuaries at Social Security and economists at the Congressional Budget Office. Second, as I showed in this blog post using historical data from sixteen countries over a 100-year period, the correlation between GDP growth and stock returns is statistically very weak. There are plenty of good arguments to make against adding personal accounts to Social Security. Spitzer should have spent more time actually making them.
Thursday, February 5, 2009
Elliot Spitzer whiffs on Social Security reform
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4 comments:
you can also add that if we hit a protracted period when private accounts don't outdo the government return then we will necessarily be in a period of severe economic contraction, calling into question how we can afford Social Security as presently constructed.
Andrew the real case against moving to private accounts is right where it always has been-transition costs.
If we lived in a world where everyone was magically under the age of forty and we were designing a retirement system from scratch arguments about the superiority of returns from stocks in a worker funded private account over a socialized pay as you go system where benefits for retirees are paid by current workers would make sense.
But to echo Rumsfeld you wake up with the world you have and not the world you want to have. In the end the numbers have to add up. So far they don't, leading to such things as 5.1% LMS solutions to a problem officially scored at 1.7% with all of the benefits flowing to people mostly not yet born.
At one level 'What's in it for me?' is an expression of selfishness. At another it is the motivator underlying any free market system. As it is I only see efforts to blame Boomers for being born or our parents and grandparents for having retirements with some level of dignity.
I still believe Backward Transfer is a misreading of the numbers, but when I see commenters whining because Ida Mae Fuller got a better ROI by living to be 100 while ignoring advances in real wages since you want to buy some people a copy of The Greatest Generation. Because that is what all of this amounts too, begrudging the people who won WWII for us their comparatively meager retirement benefits. Its all kind of mean-spirited from where I sit.
Maryland Conservative
The current formulas for setting initial SS benefits and then adjusting them later offset to a great degree the effects of even a prolonged slowdown. Essentially retirees share in the upside and the downside in fairly equal proportions to workers. The only exception is if you enter into a prolonged period of stagflation where real wages remain flat while inflation rages. It can happen, the stagflation of the late seventies largely explains the 1982/83 SS crisis to start with. But that is not where we are at today. Even a couple of years of double digit unemployment will not move the overall SS solvency numbers by much. Now if we combine that with a move to $200+ a barrel oil we might be singing a different tune. But hopefully we will not go there.
Bruce,
Your comment on transition costs is correct -- I see them as the biggest impediment to accounts, but they're also the biggest virtue of accounts. If you want a partially prefunded system, as the trust fund balance seems to indicate we do, then you want something that truly prefunds. The problem is, prefunding for tomorrow means giving up consumption today, and no one wants to do it. That's why accounts that could have been funded out the budget surplus or spending cuts end up being financed by borrowing, which defeats the purpose.
I think your comment to Maryland conservative is off. The adjustmen to benefits post-retiremetn is purely based on inflation. If wages go up or down benefits stay the same, so in general there isn't any intergenerational risk sharing. The only exception is if the trust fund becomes insolvent, but that's not a design feature. If you really wanted intergenerational risk sharing, which seems like a good idea to me, there are ways to make it work. But current law doesn't do much of it.
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