February 09, 2005, 8:20 a.m.
Personal-Account Myths
They’re not the speculative vehicles Democrats want you to think they are.

By Cesar Conda

In the Democratic response to President Bush’s call to make Social Security a better deal for younger workers through voluntary personal retirement accounts, Senate Democratic Leader Harry Reid likened the plan to a risky game of “roulette.” New York Times columnist Paul Krugman called it a “system in which workers engage in speculation that no financial advisor would recommend.” In opposing personal accounts, the American Association of Retired Persons (AARP) launched national ads stating: “Winners and losers are stock market terms. Do you really want them to become retirement terms?”

Given the way the Democrats and some commentators are talking about stocks, bonds, and mutual funds, you would assume that none of them invest any of their own money, and instead keep sacks of cash in their mattresses.

The truth of the matter is that many Democratic politicians have expressed great confidence in Wall Street through their own personal investment decisions. For example, Massachusetts Sen. John F. Kerry’s most recent public financial disclosure includes 70 pages of investments in stocks, mutual funds, municipal bonds, and other private investment vehicles. House Democratic Leader Nancy Pelosi invests in several common stocks, including approximately $300,000 in Amazon.com. Senator Reid has put his hard-earned money in a number of publicly traded blue-chip companies as well as a variety of municipal-bond funds — a good mix of diversified and stable investments.

Interestingly, while warning of the dangers of investing in the stock market, the AARP’s website promotes the AARP-Scudder Investment Program, which offers senior citizens a wide selection of 38 low-cost mutual funds, including “money market funds, bond funds, U.S. large cap funds, U.S. small cap funds, and international funds.”

If the opposition to personal accounts is not simply partisan (and that indeed may be the case), then there are only two explanations for the arguments being advanced by certain Democratic leaders in Congress. One, they believe that Americans are simply not smart enough to be given the option to select from among a handful investments choices. (Note the word “option,” since the accounts are voluntary). Two, those making the argument believe they can gain political advantage by scaring future retirees into thinking it’s more likely they would be cast adrift in the sea without a compass, rather than, in reality, earning enough money to buy their own boat.

Under President Bush’s Social Security reform plan, the management and investment options of personal accounts would be strikingly similar to those of the Thrift Savings Plan (TSP) — the retirement program available to Sen. Reid and Rep. Pelosi, their congressional staffs, and millions of federal government workers.

Like the TSP, personal retirement accounts would be invested in a conservative mix of broadly diversified bond and stock funds. In addition to these TSP-like investments, the Bush personal-account plan would offer a “life-cycle portfolio” that would reduce the level of market risk as people approach retirement by automatically allocating funds toward safe and secure government bonds.

A centralized administrative structure would minimize compliance costs for employers. Further, the TSP-style personal accounts would be low-cost, thereby preventing funds from being consumed by hidden fees. According to the Social Security administration actuaries, the administrative costs of the personal accounts would be only 30 basis points, compared to 88 to 125 basis points for bond and stock mutual funds.

In addition, under the Bush plan, retirement funds would be paid out over time through some combination of annuities and phased withdrawals pegged to life expectancy. This would protect retirees from emptying their retirement nest eggs all at once.

The Thrift Savings Plan has had a demonstrated track record of safety and soundness, while producing healthy annual rates of returns for 3.4 million federal workers. For example, the TSP’s most conservative fund, the bond index fund, has produced a 4.58 percent real annual rate of return, more than double the paltry 1 to 2 percent rate of return under Social Security.

In truth, putting your money into the current Social Security program is a riskier proposition than investing in the private equity markets because Social Security is heading toward bankruptcy and cannot pay promised benefits. Without action to fix Social Security, today’s 30-year-old workers can expect a 27 percent benefit cut when they retire — a bad deal indeed.

Members of Congress ought to give younger workers the same opportunity that they have to build a retirement nest egg that government cannot take away. If, as Sen. Reid says, the Bush plan is “like Social Security roulette,” then he should propose legislation to repeal the Thrift Savings Plan for federal government employees who are similarly exposed. But of course we know that Sen. Reid will do no such thing because it would elicit howls of protest from millions of federal workers.

Personal retirement accounts are not the speculative vehicles described by certain Democratic politicians and commentators. It is time for Washington to move beyond the demagoguery and face up to the serious challenge of making Social Security a better deal for younger workers and permanently fixing it for our children and grandchildren.

— Cesar Conda, a former domestic-policy advisor to Vice President Dick Cheney, is a senior fellow at Freedom Works.

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