Sunday, February 05, 2006

Whither Social Security?

Last year I presented a piece on Social Security reform. I want to repeat that column just below the following comments taken from an article by Tony Blankley on the President’s State of the Union Address:

“During an election campaign, political operatives are fond of seeking to induce in their opponent a negative "defining moment." That is to say a highly publicized moment when their opponent portrays everything that is wrong with him. In 2004, John Kerry provided that moment when he said he voted for the $87 billion before he voted against it.

Surely, at the State of the Union address the Democratic Party provided such a moment when, as has already been well commented on by others, they wildly applauded President Bush's statement that Congress failed to pass Social Security reform last year….

As the party of reactionary inertia -- as the party that not only doesn't have any solutions to today's dangers and problems but denies that such problems exist -- the Democrats on the floor of the House Tuesday night demonstrated a flawless, intuitive sense of its new, disfunctional self….

If one recalls, last year, the official position of the Democratic Party was not only that they opposed President Bush's Social Security reform, they argued there was no crisis -- no major problem that required rectification.

(In fact, Social Security has $4 trillion of unfunded liability, and if major changes are not made quickly, we will only be able to pay the retired baby boomers about 70 cents for each dollar of promised benefits….)

Until George Bush became president, the Democrats, for better and for worse, were a liberal party. Deformed by hatred of the current president, the Democrats have become a nihilist party.”

Social Security and the Time Value of Money

One of the joys of college teaching always obtained from my course, “Introduction to Computers”, where I taught freshmen how to develop spreadsheets using VisiCalc, then Lotus 1-2-3, and then Excel. I would tell them that they had a unique advantage, their youth, and show them the time value of money by developing a spreadsheet into which they could insert various investment amounts, interest rates and time periods.

I went back to one of those old spreadsheets the other day and found the following results. If you invest $1500 per year for 35 years (the average worklife) at 3% (the best return earned by present practices with Social Security), you end up with $94,209. If you invest at 7% (the average return on the US stock market for the past 100 years), you end up with $233,759. If you invest at 10% (the most prevalent average for various periods), you end up with $500,677. This assumes monthly compounding; with daily compounding, the differences are even more startling.

Here lies the heart of the argument in favor of putting some portion of Social Security taxes into tightly regulated individual or private accounts. Since I know that Social Security is going into the red sometime between 2018 and 2042 (depending on who is doing the forecasting and what assumptions are being made), I want something done now beyond just raising taxes, cutting benefits and/or raising the retirement age – some combination of which is necessary no matter what else we do. I want something done now for the sake of my children, my grandchildren and their children.

Those who say that this involves unacceptable risk simply do not know what they are talking about. If you take any 35 year period and average the stock market returns, the lowest figure you get is 3%, so the worst case of the stock market equals what Social Security earns now. There has to be another agenda at work here to discourage private accounts. Either that, or they have no confidence in the future of this country.

There is one valid argument against private accounts; it will require large amounts to be borrowed by the US government to finance the changeover, since tax receipts will not be enough to cover current expenditures, earlier than forecast. I liken this problem to the couple who continues to rent as they save enough to purchase a home without a mortgage. How foolish this is with rent payments going nowheres and housing prices rising by leaps and bounds from year to year.

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At 5:11 AM, Anonymous Joe said...

I have to agree with you on this one. If I live long enough,I'll probably have to pay higher taxes to finance a broken retirement system, that I never paid into,nor do I draw out of. This to me, is the height of Democratic Socialism.


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