It is natural to look at the collapse of stock prices and say, “See? Social Security privatization would be a disaster.”
But consider two possibilities:
1. The market is down because future U.S. wealth is down. In that case, government-provided Social Security in future decades is in trouble.
2. The future outlook of the economy is good. In that case, the stock market will come back, and letting young people opt out of Social Security to invest in stocks would give them a windfall.
I’ll admit that people in their 60’s should not have all of their assets in the stock market. But that is not an argument against privatizing Social Security.
The key point to remember is that the younger generation’s outlook at retirement depends on economic growth, not on what government promises them.
READER COMMENTS
8
Oct 10 2008 at 5:31pm
Even after this year, I’d still have an account worth more than 50% of what I put in, assuming it was entirely in stocks.
Right now, I believe my SS is probably about -10% or more because I will pay out to retirees now and have my benefits cut later.
Marcus
Oct 10 2008 at 5:48pm
I’ve made exactly this argument on other boards. Social Security is every bit as dependent upon a vibrant market to grow benefits as investments are.
English Professor
Oct 10 2008 at 5:56pm
What you say would be fine if private retirement accounts were not a political issue. I completely agree that on the whole people would be better off with private retirement accounts, but if we’re talking economics here, it has to be “public choice” economics. Don’t forget, they would have to be created by political action, and those who voted for them would be held responsible for any short-term declines. Now, the incredible volatility of the market makes it clear that the traders themselves are pretty close to panic; you would have to expect the citizenry to be much more irrational than the traders, so their fear would be double or triple what we’re seeing now. They would be demanding a bailout of their retirement funds. And what politician today would have the nerve to tell them to wait until the market turned?
spencer
Oct 10 2008 at 6:31pm
The problem is not how peoples defined contribution accounts have done.
Rather, it is an example of how the shift from defined benefit to defined contribution was a major reduction of the real income of every large corporation employee. If your pension was a defined benefit account this drop in the market was a risk the corporation absorbed. If your pension is a defined benefit the drop in the market is a drop you have to absorb.
this just shows how the shift from defined benefits to defined contribution was a major pay cut for the average middle class American.
English Professor
Oct 10 2008 at 6:37pm
Spencer,
I’m no expert on this sort of thing, but it seems to me that defined contribution plans have a far greater potential up-side. Also, think of what happened to people with defined benefit plans in the 1970s: they got killed by inflation. I’ll take the risk of a defined contribution plan any day of the week.
Franklin Harris
Oct 10 2008 at 6:56pm
The danger with privatizing Social Security is more political than economic. In situations like the present crash/correction, the pressure on the federal government to bail out failing businesses would be even greater than it it. Take the $700 billion figure and start multiplying it.
Dewey
Oct 10 2008 at 8:03pm
WHY! Why do you economists persist in thinking Money is wealth when Money is only a number used to measure an item of wealth.
Money is supposed to be a store of value.
I am 87 years old and at my first job in 1939 I saved 6 mos pay in a bank account. Do you think I can live for 6 months on that account?
Don’t give me that paradigm about investing. Investing is a gamblers’ game used to strip the producers of wealth who use land and labor to create wealth of the results of their labor.
The stock market is an invalid mathematical oddity which is on its way to the tulip bin.
The idea that a group of people and their tools can be thought to be worth more or less from minute to minute has to man’s greatist oddity.
PS The gold standard would convert a dollar to a commodity rather than a piece of paper.
Dewey Munson
Oct 10 2008 at 8:06pm
I forgot.
If my 1939 bank account had been a store of value I wouldn’t need SS.
Patrick R. Sullivan
Oct 10 2008 at 8:24pm
Unless the corporation absorbs the loss by laying you off.
mgroves
Oct 10 2008 at 8:42pm
I think the argument that privatized social security would be bad because of this particular stock price drop ignores two things:
– Privatized doesn’t have to mean the money has to be in stocks–it could be in municipal bonds or CDs or almost anything else and still get a better return than it is now
– Privatized doesn’t have to mean that the option to keep your money in the SS program as-is would go away either
PS I have no idea what Dewey is talking about
Les
Oct 11 2008 at 6:45am
People usually start paying into social security around age 21 or so. People usually start collecting social security about 45 years later. So the relevant investment time period is about 45 years.
Over 45 years temporary stock market fluctuations mean very little. Over the last century, one cannot find any 45 year period where the stock market return (dividends plus capital gains) were below 4%.
In the above context, stock index funds would serve well as investment vehicles for privatized social security.
Jim
Oct 11 2008 at 8:22am
The debate on privatization of Social Security conflates two distinct issues. The first is whether the government should subsidize retirement savings. The second is how to accomplish that if you believe it’s a worthy goal.
Personally, I would support getting rid of the subsidy completely. Perhaps a means tested safety net makes sense, but nothing more.
OTOH, if we’re going to be “on the hook” for everyone’s retirement, I’d suggest a subsidy that works. I am convinced that any plan that relies on the masses making good investment choices over a lifetime is doomed to failure and I’d never support it.
Andrew Biggs
Oct 11 2008 at 10:55am
If you’re interested, I’ve run some numbers (http://andrewgbiggs.blogspot.com/2008/10/how-would-you-have-done-if-your-social.html) showing how a worker retiring today would have done under a typical personal account plan. Even given the market crash, total social security benefits would have been increased by around 15%.
I have a piece coming out in National Review Online that also simulates 95 cohorts of retirees using market returns from 1871 to today; all 95 would have increased their benefits by holding a personal account.
This doesn’t prove that accounts are a good idea, that stocks are a great deal, etc. But it does disprove the talking points we’re seeing today that a person retiring under current conditions would have done very poorly.
rhhardin
Oct 11 2008 at 12:28pm
SS happens to provide about the only inflation adjusted annuity possible, given that a private company, even if inflation was an insurable risk, couldn’t be counted on to survive the 30 or so years you’d want for the annuity’s possible range. So there’s a place for government. You want an annuity because it’s insurance against outliving your income, and it’s insurance because most of the time you get back less than you put in in return for a windfall if you live a long time.
That said, future goods and services are provided by future workers to retirees, and it’s not possible to save your way out of that as a nation if the demographics don’t balance, no matter how you do it, SS or privately.
In the case of SS, the retirement age has to go up until the number of workers rises and the number of retirees falls to some balance, to track the demographics. It can be sold as that you get to live the last 8 years of your life retired, not every year after you hit 65, as life expectencies rise. So just raise the retirement age; if you want to retire earlier, do it on your own dime to bridge the (now predictable) gap.
In the case of private savings, there will be too many sellers (retirees) for too few buyers (workers saving) and that will reduce the return on investment. How much? Until you have to work long enough to retire so that the demographics balance. The same age that SS would have to rise to.
An individual can save for early retirement, but not the whole nation.
Your private retirement savings are purchases of retirees’ stock, which sales they are living on.
One additional problem with private savings is that it’s not an annuity, and so produces much less income; and if you purchase an annuity, it’s not inflation adjusted; and you can’t count on the survival of the company that long in any case.
Randy
Oct 11 2008 at 12:56pm
Mandatory investment in government and mandatory investment in the markets are hardly the only options. There are many others – and many that haven’t even been thought of. I say let people make their own choices.
Boonton
Oct 11 2008 at 4:46pm
I’ll admit that people in their 60’s should not have all of their assets in the stock market. But that is not an argument against privatizing Social Security.
Well actually it is because if social security was set up as some type of 401K system there would be plenty of 60 yr olds who would have their money in stocks (encourged by brokers and other players to do so). They would now suddenly see their retirement slashed. Given what you’re argued about voters before, how plausible would it be that they would NOT part of the massive bailouts that are happening now?
So given they will be bailed out, why wouldn’t it make sense to keep your money in stocks into your 60’s? If the market tanks, you get bailed out. If it wins, you’re retirement is that much sweeter. Moral Hazzard 101 here no?
An alternative is to set it up like a giant pension fund….people don’t choose their own mutual funds as they do with a 401K but instead a manager invests the money matching returns against expected future payments….but then who will be the pension fund manager over such a huge amount of funds?
Guess what? Right now the ultimate pension fund manager is the entire economy. Unlike a 401K or pension fund, the gov’t has the right to tax the economy. The best solution is to tax the economy to pay for benefits leaving as much as possible inside the economy to grow….but that’s more or less what we have now.
The Snob
Oct 11 2008 at 4:47pm
Here’s a slightly different angle on the question:
To what extent can we explain the long 1980-2000 bull market by the increase in capital inflows from Boomers saving for retirement?
As a 32-year-old one part of me is excited about getting to participate in the fire sale, OTOH the cynic in me says that if this is a matter of Boomer-driven inflows and outflows, we’re in for a market that looks more like 1965-1980.
spencer
Oct 11 2008 at 6:48pm
English Prof — you are 100% wrong.
In the 1970s higher inflation was accompanied by higher nominal wages. Since an individuals defined benefit pension was a function of their income in their final years of work in the 1970s individuals defined benefit pensions actually improved.
This is just the opposite of what your posited.
BigE
Oct 11 2008 at 10:33pm
I saw this post regarding social security and the stock market and I have been pondering something different but related. Does the crash of the stock market actually help the situation with Medicare and social security. Aren’t people now going to work longer and continue contributing to both programs and as a result reduce the burden on the working class? Am I totally crazy in this thought? Could this be a really significant issue?
Dan Weber
Oct 13 2008 at 9:25am
Since an individuals defined benefit pension was a function of their income in their final years of their income in their final years of work in the 1970s individuals defined benefit pensions actually improved.
Unless they were foolish enough to have retired before massive inflation rolled in.
Looking at my quarterly statements, my stock funds are of course down, but my bond funds are actually up so far this year. Even at retirement you still need stocks, but properly risk-balanced portfolios for those near or at retirement wouldn’t have taken a 25% hit.
bill
Oct 13 2008 at 10:38am
I sometimes wonder if maybe all the 401ks aren’t arbitrarily inflating stock prices. Once a company sells it stock for the first time, any time that stock changes hands the company is receiving no additional capital to invest. It’s just pieces of paper being traded that theoretically represent some percentage of assets in a company. But those company assets include things like employee knowledge, business good will, brand recognition, and tons of other intangibles. It’s not like you can walk into Wal*mart and buy $44 worth of merchandise at cost with your one share of stock.
A lot of people buying stocks through funds have no idea about the fundamentals of a company. One assumes the fund’s analysts do. Analysts for the most part didn’t see the subprime bust coming though. What happens when the boomers retire and start selling? Maybe a huge drop in stock prices, or at least a long period of flat stock prices.
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