Politics & Policy

Toomey, Sestak, and the Social Security Mess

Pat Toomey has issued a warning to fellow Republicans that, if elected, all must “live up to the principles they’ve run on” when it comes to reforming government excess. 

Naturally, Joe Sestak is trying to make hay out of Toomey’s candid approach to the reality that so-called entitlements face massive funding shortfalls. Sestak’s campaign blames the specter of Wall Street, rather than the government establishment that has spent decades squandering Social Security’s “trust fund.”

Allowing Social Security funds to be invested in the stock market threatens individual retirements, said April Mellody, spokeswoman for Toomey’s opponent, Rep. Joe Sestak, D-Delaware.

“Private accounts are a threat. Putting our retirement security in the stock market is a risky bet, and we’ve seen what can happen to stock market investments over the past few years,” Mellody said. [emphasis added]

For the youngest workers, though, would optional private investment for their Social Security payments mean a riskier investment? A riskier investment than in a government which already has shirked its fiduciary obligations?

In 2005, Alan Reynolds, a fellow at the Cato Institute, wrote about a study published in the Federal Reserve Bank of St. Louis Review.

In a hypothetical scenario, the study calculates what retirees in 2003 would have reaped if they had been allowed to invest their Social Security taxes in six-month cash deposits (CDs) or S&P 500 index funds. The results present problems for Joe Sestak’s “markets are risky bets” rhetoric:

What they found was that “over 99 percent of the U.S. population would have earned a greater return by investing in the S&P 500, and over 95 percent would have earned a greater return by investing in 6-month CDs relative to the current Social Security system.”

Specifically, “A person retiring at age 65 will only benefit more from Social Security relative to a private investment in the S&P 500 if he is a low earner and lives to be at least 96 years old. For those retiring at age 70, the only individuals that benefit more from Social Security are low earners who live to be at least 94 years old and average earners who live to be at least 108 years old.”

An important point is that we’re talking about index funds, rather than straight stock picks of the day-trading/e-trade variety. Index funds tend to be more reliable because their purpose is to take the average pulse of the market rather than make individual — and risky — bets on how specific companies or investments will perform.

Meanwhile, a Heritage Foundation report found a while back that Social Security’s rate of return is only 1.23 percent for for a two-income household of 30-year-olds with children.

This is merely to scratch the surface of the Social Security conversation. There are certainly arguments countering optional privatization that should be considered.

But Toomey’s underlying point–that there is a need to address systemic failures in Social Security–is valid. As the system encounters larger and larger shortfalls, we’re looking at a scenario of de facto generational wealth transfers — a Ponzi scheme — for our “security.”

That’s a risky bet.

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