Time to emphasize the importance of personal Social Security Accounts
By: Robert E. Meyer
The recent collapse in the stock market has caused a number of folks to smugly suggest that the advocates who promoted personalizing Social Security have buried themselves in their foxholes of embarrassment, never to be heard from again. Quite to the contrary!
The reasons for these erroneous assumptions are that the naysayers never really understood all the advantages of personalized accounts. The issue has been reduced to a false dilemma, where on one hand the government provides a defined benefit, whereas, on the other hand each person is left to his own expertise to navigate through a financial chamber of horrors, needing to invest in a gyrating stock market. That would be a wholesale misunderstanding of all the options available.
In addition, the recent exclamation “Look what would have happened if we privatized Social Security,” is purely emotion sophistry. None of the people who were eligible under Bush’s privatization plan would have been able to withdraw money for years to come, so it is irrelevant to observe that the market is way down at the moment. It is like judging a movie by viewing a snapshot.
The recent debacle on Wall Street only strengthens the arguments in favor of personalized accounts. In principle, politicians have long ago done to the Social Security Trust Fund, what CEOâ€™s did by bankrupting their firms. Yet nobody in the government is held accountable for this impropriety against the American people.
The SS trust fund is not a separate account fully funded with payroll taxes. All the money withheld for Social Security from your paycheck has been redirected and comingled with general revenues to give the government more current money for spending on social programs. The trust fund is simply an accounting entry–IOUâ€™s in the form of treasury bonds which are unfunded liabilities, redeemed as needed for the dispersions of monthly benefit checks.
Before the 2000 presidential elections, Vice-President Al Gore talked about a â€œlock boxâ€ for Social Security funds that would end the comingling practice. But the only secure lock box is one where each of us holds our own key or combination.
Thatâ€™s the initial argument for personalized accounts: The funds can only be used by you for your own personal retirement.
The next reason for personalized accounts is that it would end the pyramid scheme structure, where the current generation pays for the retirement of the last generation. Social Security is running into a funding crisis due to demographics: There are increasingly fewer workers to pay for each retiree’s benefits. Eventually, this will lead to means tests, reduced benefits, an older retirement benefit age, and the need for larger payroll tax contributions.
A third reason for personal accounts is that the current structure affords an abysmal rate of return on invested premiums. For people in my age group, we can expect no better than a 2% real rate of return on money withheld from paychecks. A person who did nothing but invest in bank CDâ€™s over the last 40 years would have easily achieved an average 5% rate of return. Such a conservative investment could produce 2-3 times the annuity payout received currently from Social Security, with the same investment.
That illustrates one need not invest in risky technology stocks to far exceed the current payouts of Social Security benefits. But if youâ€™re a risk taker, the stock market has achieved about an 11% annual rate of return since the 1920â€™s, including all the worst market declines. Letâ€™s also remember that the money is not all contributed at the same time.
And in spite of all the analysis, nobody would be forced to have a personal account, so we should stop spooking elderly citizens.
I have not yet touched on the process of converting from private to personal accounts, but will in a future column.