When your polls look bad just frighten old people about Social Security

Posted on August 18, 2010

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Barack Obama, faced with a massive defeat at the polls in the midterms, has decided to return to a hoary technique used by Democrats for decades — frightening senior citizens. Republicans, warned Obama in his weekly radio address, want to privatize Social Security! (Heaven forfend!) Seniors need to keep trusting Congress to, ahem, handle their investment decisions for them

One thing we can’t afford to do though is privatize Social Security – an ill-conceived idea that would add trillions of dollars to our budget deficit while tying your benefits to the whims of Wall Street traders and the ups and downs of the stock market.

A few years ago, we had a debate about privatizing Social Security. And I’d have thought that debate would’ve been put to rest once and for all by the financial crisis we’ve just experienced. I’d have thought, after being reminded how quickly the stock market can tumble, after seeing the wealth people worked a lifetime to earn wiped out in a matter of days, that no one would want to place bets with Social Security on Wall Street; that everyone would understand why we need to be prudent about investing the retirement money of tens of millions of Americans.

Literally, there is no retirement money in Social Security. It doesn’t exist. Nor does the government “invest” incoming funds, which go entirely now to paying current benefits. The fund holds IOUs from the Treasury, which also doesn’t have the money. The amount of cash flowing into the system has fallen below what needs to go out in order to meet benefit obligations, and the Treasury now has to sell debt to meet its SSA commitments as the fund calls in the IOUs to cover the shortfall. If that’s an investment plan, it’s worthy of Bernie Madoff.

Furthermore, that’s an arrogant statement. Obama insists that the government can make better investment decisions with the money citizens earn than the citizens themselves. Really? Heritage Foundation actually studied that question in 1998 (pre-bubble) and determined that even the most basic retirement plans would have three times the returns of Social Security:

Social Security’s inflation-adjusted rate of return is only 1.23 percent for an average household of two 30-year-old earners with children in which each parent made just under $26,000 in 1996.1 Such couples will pay a total of about $320,000 in Social Security taxes over their lifetime (including employer payments) and can expect to receive benefits of about $450,000 (in 1997 dollars, before applicable taxes) after retiring at age 67, the retirement age when they are eligible for full Social Security Old-Age benefits.2 Had they placed that same amount of lifetime employee and employer tax contributions into conservative tax-deferred IRA-type investments-such as a mutual fund composed of 50 percent U.S. government Treasury bills and 50 percent equities-they could expect a real rate of return of over 5 percent per year prior to the payment of taxes after retirement. In this latter case, the total amount of income accumulated by retirement would equal approximately $975,000 (in 1997 dollars, before applicable taxes).

In other words, if you want a decent retirement investment, don’t go to the brokerage house of Obama, Geithner, Frank, & Dodd.

via hot air

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