Of course I'm liberal, I believe in liberty.

Sunday, January 09, 2005

Insurance, Not Savings

I've been meaning to write how Social Security is not a savings plan but a form of insurance, and as such, is much more efficient at delivering a guaranteed rate of return than any individual savings plan ever could. In my mind this is the reason the current model is much better than what the president is contemplating. But I see Josh Marshal has posted a letter stating exactly what I wanted to say, so I'll just reprint it here:
Josh -

You've mentioned Social security as insurance, previously, but I think the point deserves more emphasis. Reducing social security benefits and replacing (some of) the lost benefits with private investment accounts is still gambling EVEN if the accounts earn a relatively optimistic rate of return, and EVEN if the accounts are limited to conservative investment options. The reason why private investment accounts are RISKY is because people don't know how long they will live. Someone living to (say) 95 is going to do much worse with private investments, simply because the privately invested money is going to run out well before they die.

The scam here (on the part of those trying to sell private investment accounts as a substitute) is that they (implicitly) are talking about what someone who lives to the AVERAGE lifespan will be getting. But half (or so) of retirees are going to live LONGER than average. This half will either have to withdraw money more slowly (live less well) [and how will they be able to predict this?] or will exhaust their private investment accounts long before they die.

So with private accounts, those who die early end up with some (or much) of their money going to the heirs, and those who die late end up (potentially) in poverty. Only the hypothetical "average" person (the one who dies at an average age, having exactly exhausted his/her private investments at exactly the right time) is going to do as well as any "predicted" outcome for private investment accounts.

Now, an argument can be made that private investment accounts are better than insurance; after all, if you die young all that money paid into the program just disappears with social security. With private investments you can pass the money on to those you love. On the other hand, to have the same guaranteed return every retirement year will require a much larger investment in the earlier years. If the Republicans want to have an honest debate, let's have it. They won't have this honest debate, though, because they know they will lose. It is our job to let the public know what is going on are repeat over and over again why this is a bad idea. Don't give up on security.