inherently a risk? Not necessarily
30 January 2005 - Orange County Register
A rushing tide of commentary on Social Security and its future is inundating the public these days. One commentator, Kenneth Swift, a regular on the Register’s op-ed page, took on this subject in a Sunday column. He raises some valid points about the disagreements over some of the factors relating to Social Security – what we can and can’t know for sure at this moment in time, estimates of future revenues and liabilities, what exactly resides in the “Social Security Trust Fund”, and the ever-ambiguous “transition costs” of any reform plans.
His main goal, however, is to recommend that we do just enough to save the system – such as it is – for a period measured in years. Increase the payroll tax, raise the cap on eligible wages, and raise the retirement age would fund Social Security through the end of the century. The question that should be on everyone’s mind of course is, “What then?”
Many don’t care, because they’ll be dead by then (as Rep. Rob Simmons, R-CT recently said of the 2042 emptying of the Trust Fund). “Band-aids” of increased payroll taxes and benefit reductions have been applied numerous times already – to decide that more of the same is all that’s needed is to condemn our grandchildren to the same dilemma. Instead of covering over the 75-year $3.7 trillion gap, why not address the lifetime $10.4 trillion gap?
Unfortunately, having provided his proposed cure Mr. Swift dismisses the strong case for privatization. Certainly, many of the particulars of any comprehensive reform plan will need to be carefully studied and debated – transition costs, investment choices, and benefit calculations being just a few – but respectfully, the comments he makes deriding the core of the reform plan miss the point completely.
The supposed “increased risk” privatization brings when compared to the “guaranteed” benefit of Social Security is the most disingenuous. No one would be forced to opt out of the current system, and even those who do have a risk-neutral option.
Social Security revenues are used to purchase U.S. Treasury bills, and this instrument is what makes Social Security the “guaranteed” investment it’s made out to be. Nothing would stop a risk-averse worker from investing the funds in his personal account in those same T-bills – and he’d gain a significant and perhaps unexpected benefit.
Instead of paying half a million into Social Security over his lifetime and getting benefit payments only loosely related to how many T-bills his contributions purchased (benefits which are forever subject to the whim of legislators), he will own his T-bills (and any capital gains) outright. He can use them to purchase an annuity, bequeath them to his heirs, or a combination of the two (neither of which he can do under Social Security). All at a total of zero increased risk.
Of course, those who decide to take on the slightly increased risk of index funds or mutual funds for the chance at a substantially increased final value may do so.
Mr. Swift contends that Social Security is insurance. But people buy insurance – health, life, homeowner’s – by choice. Even when a law forces the purchase of insurance (like auto insurance), we as consumers can decide how much to buy and from whom to buy it. There’s no similar degree of choice in the government-mandated insurance program that is Social Security.