15 September 2011


At various times there have been proposals put forth to privatize Social Security and/or invest proceeds in the stock market. This is a nonstarter, both politically as well as logically. Rick Perry may be an appealing candidate, and aspects of Social Security may in fact resemble a Ponzi scheme, but he has simply handed Democrats the perennial fearful campaign club of wanting to get rid of Social Security. This has been a dream of many libertarians, but it is factually untenable. The market has gone nowhere over the past ten years, and losses are quite possible even with “secure” blue chip investments; just look at GM or Citibank. When your 401(k) has gone nowhere in ten years it is sobering and necessitates a reconsideration of potential Social Security changes.

This does not mean that Social Security is not in need of some reform, such as amending the cost of living adjustment, but the fact is that Social Security is not in that much trouble. It is Medicare that is the big problem in terms of covering projected costs. Social Security is solvent and only needs minor adjustments to stay that way.

People should definitely save and invest for retirement, but through their own private accounts, such as IRAs, as they do now. These are tax advantaged and more should be done to encourage people to establish these accounts. Longer term the stock market should yield a good return, but there is no guarantee. Social Security is more like a basic floor, on top of which other resources should be prudently accumulated. Certainly Social Security can provide a better return through compounded interest over time to everyone’s account, but the stock market is too unstable to be a serious alternative for Social Security trust funds.

No comments:

Post a Comment