Thursday, February 10, 2005

Social Security Ads: Risk or Protection?

Three comments on the essay, "Social Security Ads: Risk or Protection?" at This essay considers a TV ad from Progress for America and a print ad from AARP. While have only minor criticisms to make of the pro-Social Security ad, I felt that some of their criticisms were wrong.

1. The essay suggests that Progress for America was wrong to use the word "retiree" when referring to the ratio of workers to retirees. They suggest that "beneficiary" is more appropriate because Social Security also pays benefits to non-retired survivors and disabled people.

In fact, the ad is correct to refer only to retirees because President Bush's reform plan is focused solely on the retirement fund of Social Security. The disability and survivor funds would be maintained as is. The SSA considers the revenue needs of each fund separately. Personal Retirement Accounts (PRAs) are only intended to divert retirement funds into equity accounts.

2. The essay mentions that FDR's grandson states that his grandfather would have opposed reforming Social Security. True.

It also fairly states that what FDR would or would not support is a matter of opinion. True.

Even if he opposed it today, it would not be clear if he would do so because he viewed PRAs as a bad idea, or if he were merely opposing it for partisan reasons, to support the political party he loved and led for many years. He is not alive to speak for himself.

So we would do well to take him at his word and read what he himself wrote about the future of Social Security. In his "Message to Congress on Social Security" on Jan. 17, 1935:, FDR wrote:

"In the important field of security for our old people, it seems necessary to adopt three principles: First, noncontributory old-age pensions for those who are now too old to build up their own insurance. It is, of course, clear that for perhaps 30 years to come funds will have to be provided by the States and the Federal Government to meet these pensions. Second, compulsory contributory annuities that in time will establish a self-supporting system for those now young and for future generations. Third, voluntary contributory annuities by which individual initiative can increase the annual amounts received in old age. It is proposed that the Federal Government assume one-half of the cost of the old-age pension plan, which ought ultimately to be supplanted by self-supporting annuity plans." [emphasis added]

Bush's proposal would create accounts invested in equity markets rather than annuities, but either would be self-supporting. It is doubtful that FDR could have foreseen massive participation in equity markets, since this has really only been made possible by modern telecommunications, computing and networking. But even he could foresee a self-supporting plan. Annuities bear risk to the borrower and provide security to the owner. The index funds touted by Bush do not, but provide higher returns to the owner. Still, both work by investing funds in equity markets and both are self-financed not taxpayer-financed.

The similarity between FDR's vision and Bush's proposal should be considered when thinking about what the father of Social Security would want 70 years later.

3. Like other essays, this essay remarks on the volatility of the stock market and mentions notable recent declines such as the 1987 mini-crash and the more distressing long-term slide from 2000 highs to the 2002 trough. I do not dispute the facts mentioned, but suggest that the essays omit another important fact, namely, that even five-year slides are insignificant when considered over the typical 49-year time period during which a worker pays FICA taxes.

I believe that, starting in the mid-1920s, there exists no 40-year period during which the US stock market has not yielded at least an average of 6% (and that is the floor). It is a mistake to let worry over potential short-term losses prevent an investor from reaping long-term returns. And retirement horizons are long-term.

Also, one needs to consider the effect of dollar-cost averaging which, simply stated, tells us that, given a steady stream of investment funds, the negative effects of bear markets is mitigated by the positive effects of bull markets. What matters, over the any given term, is whether assets rise in value in the end. It is important to point out that for terms of 20 years or longer, equity assets have always risen at rates exceeding the returns promised by Social Security.

No comments: