At last some sensible talk
Quote of note:
that logic is as flawed as a perpetual motion machine. If it were true, the government could erase Social Security's entire projected deficit by selling bonds at 3 percent and buying stocks that yield 7 percent.
Social Security Reform, With One Big Catch
By EDMUND L. ANDREWS
WASHINGTON
OF all the arguments being made to replace part of Social Security with private retirement accounts, few are more seductive and more misleading than the prospect of earning higher returns.
Get ready to hear a lot about this next week, when President Bush is host for a two-day economic conference that is expected to focus sharply on Social Security.
Under the current system, investment returns from Social Security are "abysmal," Mr. Bush said in one recent speech, because the trust fund is allowed to hold only low-yielding Treasury bonds.
Letting working people invest some of their Social Security money in the stock market would allow them to earn higher returns, giving them more money at retirement than they would have if they let the government do everything for them, the logic goes.
It sounds like a no-lose proposition. According to the Social Security Administration, Treasury bonds can be expected to yield a real annual rate of return of about 3 percent. Equities, by contrast, can be expected to earn 6.5 percent.
That assumption is crucial to arguments that personal accounts can reduce Social Security's long-term shortfall - which the government estimates to be at least $3.5 trillion. Most of the proposals to overhaul Social Security call for steep reductions in future benefits that would be offset by the higher returns people would presumably earn on their investments.
Stephen Goss, the Social Security Administration's chief actuary, has endorsed the assumption of higher returns. In evaluating the major proposals for putting some payroll taxes into personal investment accounts, Mr. Goss estimated that even people who hedged their risk by mixing stocks and bonds could expect an average return of 4.45 percent.
But that logic is as flawed as a perpetual motion machine. If it were true, the government could erase Social Security's entire projected deficit by selling bonds at 3 percent and buying stocks that yield 7 percent.
Why doesn't the government do just that? Because higher returns are inseparable from higher risk. No risk, no reward. And if the goal is to enhance security, if people are to have a solid reason to expect a particular level of wealth at retirement, the risks have to be relatively low.
"The entire argument is absurd," said William C. Dudley, chief United States economist at Goldman Sachs. "These returns weren't free. You are getting these returns precisely because you are taking on risk."
