Beware the AARP on Social Security
The economic structure of Social Security is precisely that of the Ponzi scheme. If you peddled the “Social Security Trust Fund” on Wall Street, you’d be thrown in jail faster than you can say Martha Stewart. It needs fixing, best done now while costs are manageable.
Meanwhile, the geezer wing of the Democratic Party, also known as AARP, is spending its tax-exempt funds to oppose the President’s plan, using old-timers like Jack Heim to do so, as well as lots of advertising:
“We can give them our message, which is, Don’t destroy the greatest program in the world,” said Heim, 84…..AARP has not held back in letting its views be known. The group this month ran ads in 53 daily newspapers and six Capitol Hill publications slamming Bush’s Social Security plans. “Winners and losers are stock market terms,” declares one ad. “Do you really want them to become retirement terms?” Another, featuring a man and woman in their early 40s, also focuses on the uncertainties the group sees in the Bush plan. “If we feel like gambling, we’ll play the slots,” the couple says.
Play the slots, indeed. Please read Democrat and financier Steve Rattner’s piece in the WaPo, which shows that existing federal worker retirment programs invest in the “risky” stock market. Would someone repeal the AARP’s tax exemption please.
Some background on stock market performance and other matters
Of course, the Democratic Party and its geezer wing are just plain wrong about the stock market being like playing the slots. Rather, as everyone with 401(k)’s, Keogh’s and, indeed, a house, knows, the market is one of the few places you get the benefits of compound interest without being taxed annually on your gain. 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. (As a matter of further risk reduction, we’d also note that the plan being advanced by the White House transitions from a heavy weighting towards stocks early on to a greater percentage of fixed-income securities as participants age.)
A final thought. A recent New York 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.
Conclusion
The AARP would be a lot better served thinking ahead to its future constituencies rather than sending out 84 year old Jack Heim to do scaremongering about changes to a plan that will have zero impact on his life. We’d add that the good news in this AARP situation is that they now can be clearly seen as the geezer wing of the Democratic Party, and that their playbook is almost as old as Jack Heim.