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Monday, December 20, 2004

The Wall Street Journal Bungles Social Security Reform 
Here's the Wall Street Journal's Greg Ip making a hash out of the debate on Social Security:

http://online.wsj.com/article/0,,SB110332836539103725,00.html?mod=pj%5Fmoney%5Fhs%5Fcoll%5Fleft

By way of comment, I'm simply including the text of an email I just wrote him.



As an interested observer of and supporter of some form of privatization of Social Security assets, I read your column today with some interest.

My comments follow:

1.) Your statement in the third paragraph, that to restore solvency that benefits would have to be cut or taxes would have to go up ignores a third possibility - and thereby misses the entire purpose of a partial privatization.

The whole idea is to increase the rate of return on social security assets. All we have to beat is the risk-free rate of return, which is currently a fistful of unmarketable treasuries yielding perhaps 2-3%.

Provided the government is successful at increasing the rate of return on SS assets, it is possible, then, to maintain benefits at current levels or higher without a corresponding increase in FICA.

2.) You drastically understate future liabilities for the social security system. Unless you can demonstrate that actuaries have identified a future point where the worker/retiree ratio will again generate an operating surplus that will be sustained - and I don't think you can - then unfunded liabilities for "the entire future" are infinite.

Don't know what flack spoonfed you the 10 trillion dollar line, but if he told you that that's the figure for the entire future, you've been had.

The figure is meaningless without a time frame. But time frames are meaningless unless the demographic challenges reverse themselves at some identifiable point in the future.

3.) Your statement: "By 2042, the IOUs will be spent."

The IOUs, unfortunately, are already spent.

4.) Re: your statement: To keep Social Security afloat, private accounts would probably be coupled with steep cuts to traditional benefits.

Ok, for whom? Point him out to me? Has he paid in a cent? No one is contemplating steep cuts in traditional (I'm reading "guaranteed") benefits to anyone in the workforce. Workers would be free to keep the current SS structure for themselves if they prefer. You left that part out for some reason.

As for anyone not yet in the work force, a worker's career typically lasts 40 years. Can you identify any 40-year time period in the history of the capital markets in which a portfolio of stocks did not outperform a portfolio of treasuries?

How about we make the hurdle even easier and dial it back to 30 years?

20 years?

Here's another risk, which you totally ignore: The risk that traditional Social Security benefits will be wholly inadequate for someone who desperately needs the income to live on.


Your argument that a worker would probably be worse off than under the current system simply lacks basis in fact.

4.) "Under most proposals, workers would generally be steered to diversified funds such as index funds"

Ok, is ANYONE seriously arguing that Social Security include a brokerage window that would allow investors to put everything down on losses-dot-com?

No?

Then why not so state?

5.) You quote Mr. Gramlich as noting that there is no history of the government reducing benefits to retirees. But that's not Mr. Gramlich noting a fact. That's Mr. Gramlich making a claim. And that claim is false: the Clinton Administration raised taxes on Social Security benefits in the mid 1990s. If that's not a benefit cut I don't know what is. Why did you not point that out?


Best,

Jason Van Steenwyk

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