Social Security "Reform" Logic Flawed

New York Times:

But that logic is as flawed as a perpetual motion machine. If it were true, the government could erase Social Security's entire projected deficit by selling bonds at 3 percent and buying stocks that yield 7 percent.

Why doesn't the government do just that? Because higher returns are inseparable from higher risk. No risk, no reward. And if the goal is to enhance security, if people are to have a solid reason to expect a particular level of wealth at retirement, the risks have to be relatively low.

"The entire argument is absurd," said William C. Dudley, chief United States economist at Goldman Sachs. "These returns weren't free. You are getting these returns precisely because you are taking on risk."

To be sure, one of the biggest ways to reduce risk is to have a long time frame. People who invest at age 30 or even 50 have the time to ride out most of the ups and downs of the stock market.

But there are no guarantees. According to Ibbotson Associates, which publishes data showing average returns over different periods, large-cap stocks actually suffered a loss of 1 percent, annualized, from early 1929 to the end of 1942.

Granted, it is somewhat unfair to pick a time period that begins just before the great stock crash of 1929 and continues through the Depression. But many analysts contend that it is even more misleading to suggest that people should have complete confidence in their ability to earn above-average returns with no risk whatsoever.

Surprisingly, the Social Security Administration actually goes further than that. In addition to relying on the premise that equities will yield higher returns than Treasury bonds, Mr. Goss of the Social Security Administration suggested that returns in the future might be even higher than those of the past.

So the logic of equity investments earning more than treasury bonds is flawed as concerns Social Security. Part of the plan is also that whatever gains someone would make in their individual account would offset what is owed in the general fund -- so even if you do well in your indexed fund in the stock market -- you would end up getting exactly the same amount. There is no real "ownership." The individual takes the risk, but the government gets the gain.