Social Security Reform Made Real Easy
Here’s the fundamental decision: you are either going to pay social security benefits out of current national income, or you are going to pay some portion of it out of savings. Which is better? Do you want to have to pay your kids’ college tuition out of your salary, or would you rather have set aside some money twenty years ago, so that you can pay it out of those savings? It’s really that simple. Anyone who cannot see the wisdom of having savings available to pay expenses rather than having to rely on current income — that is not a serious person.
Of course the New York Times leads the list of non-serious persons, as Tom McGuire ably demonstrates. I’m sure Paul Krugman supports the Times’ editorial line, another point in favor of our position. This space is not going to bother with the scare-mongering of the NYT, but point out a couple of historical items of interest.
Here’s a chart of Dow Jones Industrials’ performance:
From the low in 1932 of about 41 to today’s roughly 10,500 — that’s an 8.0% average annual increase in the broad stock market over 72 years. To put it another way, using that 71 year span to good effect, imagine a child born today who will retire at 72, in the year 2076. If you gave that child a $1000 in stocks diversified like the Dow, it would be worth $256,000 in 2076, assuming no taxes and the same rate of growth. That’s fantastic, you say, too good to be true. Perhaps you are right. But any positive savings rate is better than having no savings at all, which is the current system.
Here’s another objection. The chart shows a big decline before it went to 41 in 1932. What about if there’s another market crash? Let’s take a look. The 1929 peak in the Dow was around 299 just before the crash. Using 1929’s peak as the benchmark, the compound growth rate in stocks is only 4.9%, and that baby born today with the $1000 portfolio would be a measly $30,000, which is terrible. Except for one thing: it’s still better than zero saving, which is what you have under the current system. So even building in the worst economic calamity in US history, it’s better to save than not to save. D’oh!
The worst case listed above is an aberration. The average nominal return on stocks since 1802 has been about 8.1%, pretty consistent with our first example.
Another important point that can be gleaned from charts is: don’t get caught up in issues of performance over a period of a few years — those problems are solved by compounding over a period of decades. Take a look at this chart from BigCharts and tell me what the Dow will be trading at in 2040:
It’s pretty obvious you can’t tell a thing about the next 35 years in stock performance by looking at the last half dozen years of the chart. But you may be able to tell something by looking at the overall chart, which itself covers about 35 years — a period when the DJIA went from around 1000 to around 10,000.
A final thought. The Times’ editorial proposes “a plan to phase in slowly a modest package of tax increases and benefit cuts” in order to “save” the current Social Security system. Someone tell me why such a lousy benefit — tax increase plan is worth saving. As in most matters, the nation has moved away from the Socialist Workers’ Paradise on 43rd Street. The real debate is now about transition costs. The White House will say that no tax increases will be necessary to fund the trillion dollar transition costs, and use clever charts like this:
The opposition will use charts like this to argue for tax increases during the transition (and other tax increases after the transition, etc.):
This dealing with transition costs seems to us to be the real locus of the debate, not the fatuous notion that spending is a better long-term strategy than saving.