Politics & Policy

Let’S Get Personal

Kinsley and Reiner: Social Security meatheads.

TA good actor can take someone else’s words and make them believable. A good columnist can, too.

Recently, syndicated columnist Michael Kinsley latched on to an idea first floated by actor Rob Reiner. Kinsley and Reiner want to prove that personal retirement accounts for Social Security cannot work. But their arguments are simply wrong.

Kinsley and Reiner claim that there is no way a conservative portfolio of stocks and bonds can grow at an average rate of 4.7 percent annually (after inflation) if the economy grows as slowly as Social Security actuaries predict. That 4.7 percent return is important; it’s what the Heritage Foundation estimates a personal account would earn after inflation. Although Kinsley didn’t mention it, the Heritage prediction is based on a portfolio that consists of 50 percent stock index funds and 50 percent government bonds.

Such a return is possible and even likely. A new study by the London Business School shows that stock market returns are higher on average in slower-growing economies than in rapidly growing ones. The study found that investors earned 12 percent a year buying in down markets and only 6 percent when market growth was in the top 20 percent.

Just three days before Kinsley’s column (“The Meathead Proposition“) was published, Stephen C. Goss, the nonpartisan chief actuary for Social Security, used precisely the economic assumptions criticized by Kinsley to project that over the next 75 years, “the long-term ultimate average annual real yield assumed for equities [stocks] is 6.5 percent.” Congressional Budget Office estimates echo these numbers.

Kinsley and Reiner also claim that if the economy grows faster than the actuaries predict, Social Security’s problems will be solved without personal accounts.

But several studies, including data from the nonpartisan Social Security actuaries, show that there is virtually no chance that faster economic growth could solve Social Security’s coming huge deficits.

In fact, higher economic growth would make the problem worse. Yes, higher earnings would increase the amount of Social Security payroll taxes collected in the short run. But because benefits are linked to wages, they also would increase the amount of retirement benefits that would have to be paid.

The actuaries do admit that there is a 2.5 percent chance the economy could grow fast enough to solve Social Security’s problems. Of course that also means that there is a 97.5 percent chance that it won’t. It certainly doesn’t make sense to gamble our children’s retirement security on such odds.

Most disturbingly, Kinsley writes:

But if free markets work the way they are supposed to — and I would like to hear The Heritage Foundation say that they do not — the effect of the government’s announcing that government bonds are a bad investment and officially pushing people to put their money elsewhere will be to make it more expensive for the government to borrow money. So even if private stocks and bonds are a better long-term investment than government bonds (after factoring in risk and so on), they won’t stay that way for long.

This makes little sense. No one is saying that real government bonds (as opposed to the non-negotiable “bonds” that substitute for real assets in the Social Security trust fund) are a bad investment. The Heritage projections, as noted above, are based on personal accounts that are 50 percent invested in government bonds. The Bush proposal assumes that 20 percent of personal accounts are invested in government bonds. Government bonds are a fine investment for people who want to avoid risk and can afford the lower returns paid by government bonds.

On the other hand, stocks and other types of bonds pay a higher return in part because they have a higher risk level. Stocks and bonds rise and fall by the day, week, and month. However, over long periods (such as 20 years or more), they almost always rise at a significant annual average rate.

This is what makes stocks and bonds perfect for retirement investing. Holding them for 20-plus years virtually guarantees significant profits at a fairly low risk level. A system of personal accounts would increase demand for both stocks and government bonds. There is no reason to assume that demand for either will fall or that the risk-based difference between what each pays will change significantly from the projections being made by the Social Security Administration or the CBO.

We can have personal accounts that allow individuals to build retirement nest eggs they will own and control. In fact, such accounts are the only proposal on the table that can preserve Social Security for decades to come. The time to act is now.

David C. John is a research fellow at the Heritage Foundation.

Most Popular

Media

The Unseemly Urge to Excuse Jeffrey Toobin

Jeffrey Toobin, legal analyst for CNN and The New Yorker, was suspended from his jobs and subjected to a round of public mockery for visibly exposing himself while masturbating on a Zoom call with New Yorker colleagues. The call was designed to role-play post-election scenarios for a contested election; Toobin ... Read More
Media

The Unseemly Urge to Excuse Jeffrey Toobin

Jeffrey Toobin, legal analyst for CNN and The New Yorker, was suspended from his jobs and subjected to a round of public mockery for visibly exposing himself while masturbating on a Zoom call with New Yorker colleagues. The call was designed to role-play post-election scenarios for a contested election; Toobin ... Read More

Biden Can’t Tax the Rich

Joe Biden’s tax plan is based on a deathless myth: that taxes are actually paid in economic terms by those upon whom they legally fall. The obviousness of this nonsense is clear enough if you put the proposition into plain English: “Don’t you worry, now, we’re not going to raise taxes on you, Bubba — ... Read More

Biden Can’t Tax the Rich

Joe Biden’s tax plan is based on a deathless myth: that taxes are actually paid in economic terms by those upon whom they legally fall. The obviousness of this nonsense is clear enough if you put the proposition into plain English: “Don’t you worry, now, we’re not going to raise taxes on you, Bubba — ... Read More

The Pollster Who Thinks Trump Is Ahead

The polling aggregator on the website RealClearPolitics shows the margin in polls led by Joe Biden in a blue font and the ones led by Donald Trump in red. For a while, the battleground states have tended to be uniformly blue, except for polls conducted by the Trafalgar Group. If you are a firm believer only in ... Read More

The Pollster Who Thinks Trump Is Ahead

The polling aggregator on the website RealClearPolitics shows the margin in polls led by Joe Biden in a blue font and the ones led by Donald Trump in red. For a while, the battleground states have tended to be uniformly blue, except for polls conducted by the Trafalgar Group. If you are a firm believer only in ... Read More
Elections

How Trump Should Approach the Final Debate

The so-called mainstream polls of the swing states show the race narrowing. If the trend continues at the current rate, President Trump could poll even in two weeks—in addition to the “other” polls that show him near there already. So Trump’s mission at the final debate on Thursday is to continue to ... Read More
Elections

How Trump Should Approach the Final Debate

The so-called mainstream polls of the swing states show the race narrowing. If the trend continues at the current rate, President Trump could poll even in two weeks—in addition to the “other” polls that show him near there already. So Trump’s mission at the final debate on Thursday is to continue to ... Read More