Monday, February 07, 2005

I'm Not Wild About Harry

I haven't blogged nearly enough regarding the Social Security debate, but it's a combination of football obession and too much work that prevented me from pointing out a couple good links. first, we have George Will tearing Senate Minority Leader Harry Reid a new one...

In December, Reid, speaking about President Bush's proposal for Social Security reform—a proposal Bush had not yet announced—said: "[Republicans] are trying to destroy Social Security by giving this money to the fat cats on Wall Street." Good grief. "Destroy"? The "fat cats" will not get fatter from the estimated 0.3 percent cost of handling the funds.

Reid's hyperbole suggests that Deanspeak is contagious. In Reid's televised "response" to the president's State of the Union address—written before the address—he disparaged the idea of voluntary personal retirement accounts funded by portions of individuals' Social Security taxes as "Social Security roulette." This is the crux of the Democrats' argument against Bush's plan: Equities markets are terribly risky—indeed, are as irrational and risky as roulette. Think about that.

Roulette is a game without any element of skill. By comparing the investment of some Social Security funds in stocks and bonds to gambling on roulette, Reid is saying that the risks and rewards of America's capital markets, which are the foundation of the nation's economic rationality and prosperity, are as random as the caroms of the ball in a roulette wheel. This, from a national leader, is amazing.
As Will points out, it's apparently not a dangerous enough form of roulette for Reid to skip participating in the federal Thrift Savings Plan. Maybe Reid just used the analogy to promote his home state's biggest industry -- the only other option is that he's an idiot. Well... maybe that explains that glazed look on his face during his response to the State of the Union. And he has to work with Barbara Boxer, which would drive me crazy.

The Lord of Truth sends along a much better analogy, using "Ants and Grasshoppers", one that makes more sense every time I read it...

Suppose that a "retirement genie" alighted on your doorstep and informed you that he had just taken the liberty of reorganizing your finances. To ensure your future safety, the genie transferred all of your savings into a special account with a number of features. First, you cannot touch the monies in the account until you retire. Second, if you and your spouse die, the money is lost unless you have school-aged children. Third, the minute that you retire you will be forced to convert your entire accumulation into an annuity that dribbles the cash out at a low monthly rate. Fourth, the account funds cannot be invested in a well-diversified portfolio of stocks and bonds, but must be parked in a single low-yield government instrument. Finally, you must contribute 12.4% of your earnings into the account every year.

It is hard to imagine that anyone would view these machinations as good news. Indeed, the constraints have a nightmarish quality to them. Since you cannot touch the money until you retire, you no longer have a rainy-day fund, or a down payment for a house. Those whose family histories include significant health risks are punished in one of two ways. If they die before they retire, they never get their benefits. Even when they survive to retirement, they are less likely to live long enough to make the annuity a good deal.

The constraint that the monies not be invested in a well-diversified portfolio violates standard professional practice. Finally, common sense and economic theory suggest that savings should be negative when individuals are young since incomes generally rise throughout adult life. It makes more sense to save when you have relatively higher income. The steady contribution path forces you to live a Spartan life in your youth, often relying on costly credit-card debt.
In the end, Social Security reform will pave the way for more entitlement reform. A better world awaits.


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