[Homestead] Gambling with retirement monies
genegerue at ruralize.com
Fri Feb 4 10:12:26 EST 2005
Gambling With Your Retirement
By PAUL KRUGMAN
Published: February 4, 2005
A few weeks ago I tried to explain the logic of Bush-style Social Security
privatization: it is, in effect, as if your financial adviser told you that
you wouldn't have enough money when you retire - but you shouldn't save
more. Instead, you should borrow a lot of money, buy stocks and hope for
Before President Bush's big speech, a background briefing by a "senior
administration official" made it clear that the plan calls for exactly the
"borrow, speculate and hope" strategy I described - not just for the system
as a whole, but for each individual.
Here's the money quote: "In return for the opportunity to get the benefits
from the personal account, the person forgoes a certain amount of benefits
from the traditional system. Now, the way that election is structured, the
person comes out ahead if their personal account exceeds a 3 percent rate
of return" - after inflation - "which is the rate of return that the trust
fund bonds receive. So, basically, the net effect on an individual's
benefits would be zero if his personal account earned a 3 percent rate of
Translation: If you put part of your payroll taxes into a personal account,
your future benefits will be reduced by an amount equivalent to the amount
you would have had to repay if you had borrowed the money at a real
interest rate of 3 percent.
Peter Orszag of the Brookings Institution got it exactly right: "It's not a
nest egg. It's a loan."
For years, privatizers - including Mr. Bush - have claimed that people
would do better with private accounts than with traditional Social Security
even if they played it safe and invested in U.S. government bonds (which
yield 3 percent after inflation).
But the official at the briefing made it clear that his boss was fibbing:
if you invested your private account in government bonds, you would face
benefit cuts equal in value to your investment, so you would be no better
off than under the current system.
The only way to get ahead would be to invest in risky assets like stocks,
and hope for higher yields. But if the investment went wrong and you earned
less than 3 percent after inflation, your benefit cuts would leave you
poorer than if you had never opened that private account.
So people are expected to take a loan from the government and use it to buy
stocks, and if that turns out to have been a mistake - well, too bad.
Experts usually tell people to plan for their retirement by investing in a
mix of stocks and bonds. They disapprove strongly of speculation on margin:
borrowing to buy stocks. Yet Mr. Bush wants tens of millions of Americans
to do exactly that.
Meanwhile, what does any of this have to do with the ostensible purpose of
the whole thing: saving Social Security?
Here's the senior official again: "In a long-term sense, the personal
accounts would have a net neutral effect on the fiscal situation of Social
Security." The government would have to borrow huge sums up front to create
the personal accounts - $4.5 trillion in the first two decades - but it
would supposedly make up for all that borrowing with offsetting cuts in
account holders' benefits many decades later.
Color me skeptical: will retirees with private accounts that performed
badly really be forced to repay their loans in full? Even if they are,
private accounts will at best have a "net neutral effect" - that is, they
will do nothing to improve Social Security's finances. Mr. Bush says the
system faces a crisis; what does he propose to do about it?
The answer, presumably, is that his plan will also involve major benefit
cuts over and above those associated with private accounts. And it's true
that you can improve Social Security's finances with privatization, as long
as you also slash benefits - just as you can kill a flock of sheep with
witchcraft, provided you also feed them arsenic. (Thanks, M. Voltaire.)
Do you believe that we should replace America's most successful government
program with a system in which workers engage in speculation that no
financial adviser would recommend? Do you believe that we should do this
even though it will do nothing to improve the program's finances? If so,
George Bush has a deal for you.
E-mail: krugman at nytimes.com
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