Social Security Outperforms Dow Jones (Sometimes)

Via of all places the increasingly irrelevant Wonkette, this item from the Christian Science Monitor—One man's retirement math: Social Security wins:

For 45 years, the defense-industry analyst paid into the system until his retirement in 1994. But with all the recent hoopla over reform, Mr. Logue, a Massachusetts Institute of Technology graduate, decided to go back and check his own records. Would he have done better investing his money than the bureaucrats at the Social Security Administration?

He recorded all the payroll taxes he paid into the system (including the matching amount from his employer), tracked down the return the Social Security Trust Fund earned for each of the 45 years, and then compared the result with what he would have gotten had he been able to invest the same amount of payroll tax money over the same period in the Dow Jones Industrial Average (including dividends).

To his surprise, the Social Security investment won out: $261,372 versus $255,499, a difference of $5,873.

Yes, it's partly a timing phenomenon (but people who depend on retirement income are less able to time than others), and yes, “Advocates of privatization point out – correctly – that Logue's analysis compares theoretical stock returns with what the Social Security Trust Fund earned – not what he himself would get from the system.” But not everyone has optimum earnings. And the transactions costs and fees of private plans are going to be much, much larger than what the efficient Social Security Administration (arguably the most efficient agency in the federal government) currently spends. Which is why Wall St. is salivating.

Indeed, as the Monitor points out, “The debate hinges considerably on what people want their retirement system to be. Social Security has always been an insurance program. It was never intended as an investment scheme.” And relying solely on private pensions means you inevitably get a cadre of very poor old people:

… under Britain's privatized pension system, so many retirees are doing so poorly at this moment that a commission warned this fall that widespread poverty among the elderly may be returning, which could require massive new government spending.

Wouldn't it be nice if we could get this sort of reasonable thinking into the mainstream.

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18 Responses to Social Security Outperforms Dow Jones (Sometimes)

  1. The part that win, lose, or break even, Wall Street gets a cut, might bear more emphasis. Privatization is sold as higher returns to the investor, but that’s a risk – a big risk Profits for Wall Street, however, are a certainty.

  2. Marc says:

    I’d take a risk if it gave me control over my future. That said, I’d rather be able to trust the government to properly insure my future livelihood. Since we can’t trust the government to not steal our money and destroy our future, I’d rather have the risk of my future security shifted to me.

  3. Paul Gowder says:

    I think this is fundamentally a generational warfare tactic. There doesn’t seem to be any disagreement from the position that, as currently funded, social security will be in an absolute mess by the time any generation post-baby boom gets into retirement (simply because of population distributions if nothing else). The solution offered is for those generations to turn around and screw the baby boomers via yanking all the money from the system now. Personally, I’d support that, except I’m really not inclined to screw my mother, or the mothers and fathers of everyone else…

  4. cafl says:

    This statement is clearly false: “There doesn’t seem to be any disagreement from the position that, as currently funded, social security will be in an absolute mess by the time any generation post-baby boom gets into retirement (simply because of population distributions if nothing else).” Projections of Social Security deficit depend on the economic forecast of real growth. From here:

    Social Security is not going broke. The trustees instead project a financing shortfall that may happen almost 40 years from now. The nonpartisan Congressional Budget Office doesn’t project a shortfall until 2052. The trustees’ projections are based on pessimistic assumptions. Real growth is expected to fall to between 1.7% and 1.8% over the long-run, which has never been the case for an extended period of time during the post-war years. Similarly, the trustees assume that in the long-run the economy will settle on an average productivity growth rate of 1.6%, which is again too low by historical standards. Higher productivity and consequently faster real wage growth — which have both historically been about 2.0%—would be more realistic and improve Social Security’s finances.

  5. ent lord says:

    Social Security was originally intended as an entitlement, a social safety net for those individuals who due to improvidence or bad luck would have starved in other generations. It was not intended to be a stand-alone retirement plan nor was it meant to provide proportional returns to individuals based on amounts paid in. For that reason, my grandfather was able to make a nominal number of payments to qualify for Social Security at age 65 until his death at age 89. On the other hand, my father, despite receiving payments at age 62, died at age 63, after paying into the system for 30 years.
    If the president is indeed in favor of a private form of retirement program, I would suggest he look at a 401K, a SEP, any number of IRAs, or other retirement programs long available to average working stiffs. If he is really serious about allowing his fellow citizens to save enough to not have to eat dogfood in their latter years, I would suggest expanding existing programs over this bizarre attempt to change Social Security.
    I suppose Ken Lay would be named Administrator for this privatized fund.

  6. Paul Gowder says:

    Cafl: your comment presumes that post-war U.S. growth was anything other than an abberational product of that period of U.S. history (increased defense spending, new deal followed by great society, space race, etc. etc. etc.). Given the current overpopulation, erosion of the manufacturing base, destruction of “dust bowl” topsoil, etc. etc., I find any contention that economic “growth” is likely to sustain the social security system based on post WWII economic patterns to be dubious at best.

    Besides which, I’ve always thought the pursuit of economic “growth” for its own sake is fundamentally destructive, since it is based on the same — finite — number of resources. Unles real efficiencies (read: scientific advances) are created, “growth” nowadays seems to be primarily increased consumption. Which is unsustainable, and hence unwise in the long term.

  7. I have no idea what the rates of productivity and GDP growth will be over the next 40 years….and of course neither does anyone else.

    But it should be pointed out that Bush’s tax cut policy assumptions are based on projected growth rates in the 4-5% range—but Bush’s “crisis in Social Security” is based on 1.8% annual growth.

    And until George W. Bush can explain to me why he is using two different sets of numbers to justify two different (and highly dubious, imho) policy initiatives, I’m going to oppose Social Security privatization AND support the rescinding of the fat cat tax cuts.

  8. Mojo says:

    In addition there is a third, implied, rate of growth being used to sell us this pig in a poke. Most people who favor privatization assume that their rate of return for private investments will be similar to post-WWII averages; not the abysmal returns they could realistically expect if the nation really has a sub-2 % annual growth rate.

  9. Paul Gowder says:

    Right, so we don’t know the expected rate of growth. Are we agreed on that? Right. Then what’re the fundamental three differences between public social security and private investment plans?

    1. Identify of the administrator
    2. Risk.
    3. Intergenerational transfer.

    It’s #3 that makes me slightly less violently opposed to the Bush plan than before. It is greatly irksome that the social security system works by paying retirees out of contributions made by current income-earners, as opposed to those made by the retirees themselves. Admittedly, parts of the plan are tied to the income made by those retirees when they were working, but it’s still an intergenerational transfer, they don’t actually receive any amount tied to the proceeds of their contributions.

    What that amounts to is an aggregate incentive to overpopulation, insofar as it requires an increase in the next generation in order to fund the system. (We call that a “ponzi scheme.”)

    Excerpts from the SSA website (
    Q: I’m 35 years old. If nothing is done to improve Social Security, what can I expect to receive in retirement benefits from the program?

    A: Unless changes are made, at age 73 your scheduled benefits could be reduced by 27 percent and could continue to be reduced every year thereafter from presently scheduled levels. See the Trustees Report

    Q: I’m 25 years old. If nothing is done to change Social Security, what can I expect to receive in retirement benefits from the program?

    A: Unless changes are made, when you reach age 63 in 2042, benefits for all retirees could be cut by 27 percent and could continue to be reduced every year thereafter. If you lived to be 100 years old in 2079 (which will be more common by then), your scheduled benefits could be reduced by 33 percent from today’s scheduled levels. See the Trustees Report

    Q: I hear that Social Security has a big financial problem? Why?

    A: Social Security’s financing problems are long term and will not affect today’s retirees and near-retirees, but they are very large and serious. People are living longer, the first baby boomers are five years from retirement, and the birth rate is low. The result is that the worker-to-beneficiary ratio has fallen from 16-to-1 in 1950 to 3.3-to-1 today. Within 40 years it will be 2-to-1. At this ratio there will not be enough workers to pay scheduled benefits at current tax rates.

    Q: How big is the future problem?

    A: Social Security is not sustainable over the long term at present benefit and tax rates without large infusions of additional revenue. There will be a massive and growing shortfall over the 75-year period.

    Social Security’s Chief Actuary projects that in present-value dollars the total net Social Security cash flow for years 2004 through 2078 is projected to be nearly -$5.2 trillion. When the trust fund balances of $1.5 trillion at the beginning of 2004 are added to this value, we get a financial shortfall (or unfunded obligation) for the 75-year period of $3.7 trillion. This unfunded obligation indicates that if an additional $3.7 trillion had been added to the trust fund at the beginning of 2004, the program would have had adequate financing to meet the projected cost of benefits scheduled in current law over the next 75 years. See the Trustees Report

    Now, admittedly, this has every indication of being propaganda placed at the orders of the Bush Administration (I wouldn’t put it past ’em), but the reality is that — projections as to growth rates aside — you can’t run a ponzi scheme without having more people paying than receiving. As birth rates decrease and lifespans increase, the system becomes more and more unsustainable. In that aspect, the Bush administration is simply right. As much as it pains me to say it.

    (As for the tax cuts: how many times do we have to refute supply-side voodoo before the republicans stop trying it?!)

  10. Linkmeister says:

    “… how many times do we have to refute supply-side voodoo before the republicans stop trying it?!”

    Every damned time. They’re like the mule that gets hit with the two-by-four but still doesn’t pay attention.

  11. cafl says:

    Social Security Retirement Insurance is not a retirement savings plan. It is insurance against a destitute old age. (For a good discussion of this, go over to the Angry Bear). As for the Boomers and their (our) contribution vs. our benefits, the Alan Greenspan-headed Commission to Save Social Security of 1983 or so inspired a rise in payroll taxes to be put in the S. S. Trust Fund, which has been used by the Bush Administration for tax cuts, etc. If you recall, we had a surplus going into the Bush administration, and the reason put forward for this was to pay down the debt so that when the Boomers retired there would be headroom to pay benefits without the debt becoming too large a share of GDP. Now Bush is claiming there is a Social Security crisis. No, there is a general fund crisis and he caused it. In no way is Social Security a Ponzi scheme.

  12. Paul Gowder says:

    Cafl, I agree with every single thing that you said in your last comment except the last sentence. Yea, it would be nice if we had a fiscally responsible government like we did during the Clinton years.

    A surplus, and then supplementation from the general fund, would work.

    Heavy means-testing would at least make a start of working.

    Private investment accounts… well, they might work for my generation, although they’d screw the old, and I’m really not inclined to screw the old.

    But we need SOMETHING or Social Security will be kaput after the boomers finish with it.

    Oh, and what difference does it make whether it’s “insurance” or “a retirement plan?” Insurance against a destitute old age needs to be funded too…

  13. cafl says:

    “We need to do something”…. It’s called “roll back the tax cuts”. And from my perspective, bringing the troops home from Iraq would have the salutary side effect of lowering the budget deficit.

  14. Paul Gowder says:

    Well, yea.

    I think we really ought to be doing some serious means testing. I mean, c’mon. There is absolutely no good policy reason to have the income of the working poor taxed to send checks to the retired rich. While we’re at it, the wage cap on social security taxes ought to go too. Completely. Why should income above 80 grand a year be exempt from social security taxes exactly? That’s the most nauseatingly regressive tax idea I’ve ever heard. The combination of the two is insane.

  15. JollyBuddah says:

    A good starting point for becoming informed about the Social Security debate is a fifty page summary linked text of the Diamond-Orszag Plan from their book “Saving Social Security”. The Tax Professor linked text has promised to comment on the CBO analysis of the Diamond-Orszag Alternative. Two things their plan does are gradually raise the payroll cap to $111,000 and add a 3% legacy tax on income above the payroll cap. In addition to providing additional insurance protection for the disabled, children survivors and widows/widowers, Diamond & Orszag’s plan guarantees that a 25 year old would receive the equivalent of a $19,000 income in 2004 constant dollars at retirement.

    Their summary is a reasonably thorough digest of their book. Their plan is the most honest and responsible approach to permanently reforming Social Security.

  16. nigel coleman says:

    Liberals…. You justs don’t get it. Privatizing Social Security is not about how much money you’ll make in the stock market versus the current plan. It’s about FREEDOM, why does the government take money from me to give to old people? Why am I responsible for a plan, I never got to vote on, that tells me how much and when to save for old age? Maybe I need that money right now to feed my children or pay college loans. The point is I should get to save for my own retirement, on my own terms. Government is there to do things people can’t or shouldn’t do for themselves. Saving for retirement is someting we can all do and should.


  17. Paul Gowder says:

    Nigel: Some of us think policy should be done on a rational basis. What you’re saying is that irrelevant considerations that apply to each and every government function are the real reason you and your co-partyists support gutting Social Security. Rather than straightforward dollars and cents considerations that actually determine whether you’re helped or hurt. Thanks for this confession.

    I think I’d like to ask that the federal funds that go to your benefit, for which I pay taxes, be immediately cut off. Because, hey, get your hand out of my pocket. Say bye-bye to educational, police, and road subsidies, as well as FEMA, whatever pork your neighborhood gets (particularly if you live in an area with lots of defense contractors. Oh, did I mention that I’m not inclined to pay for Bush’s oil war?). Because after all, you should be individually responsible for educating your children, guarding yourself from crime, transporting yourself, insuring your property and stimulating your own economy.

    “Government is there to do things people can’t or shouldn’t do for themselves. Saving for retirement is someting we can all do and should.”

    We have these things in this country. They’re called “poor people.” We also have these things called “recessions” and “stock market crashes.” Generally, they’re caused by Republican policy. They tend to make it difficult for the “can” to match the “should.”

  18. Chris says:

    Nigel wrote: “Government is there to do things people can’t or shouldn’t do for themselves. Saving for retirement is someting we can all do and should.”

    The second sentence does not follow from the first. I seem to recall from one of Michael’s earlier posts that the truth claim made in the second sentence simply isn’t happening. With health care & other expenses (like housing & energy) increasing at the same time salaries are generally flat, I fail to see how one can save anything of consequence through his or her own devices. We would–and many do–just go deeper into debt with each passing year.

    The only thing that saves some of us is employer contributions. While RIT contributes 10% toward my retirement (I need only contribute 2% on my own), my sense is that this is unusually generous. My father’s employer offers 2%. None of these employer matches are guaranteed, and can be rescinded at any time. And many people, like part-timers & temps, don’t get so much as a nickel. Businesses are there to make a profit, not to be a charity to its employees (unless there is money to be made in it), so I don’t see them helping families out to save. Who’s left to help people save for retirement?

    Thus, if the first sentence of Nigel’s quote above is a sincere description of Republican sentiment, and one combines that with the reality of finances in America in the early 2000s, then it is clear that the elderly will in fact generally require government assistance. The “freedom” of privatization will only be nominal, yet another glittering euphamism to hide a depressing reality.

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