I am puzzled by one part of the argument that some have made about the supposed “riskiness” of social security reform. Albert Crenshaw, a business columnist in the Washington Post yesterday called it a “retirement crapshoot”, for instance:
And now the Bush administration says it wants to do something similar with Social Security. Instead of a set of benefits fully guaranteed by the government, the administration envisions some type of “personal accounts” — details to come — that could accumulate real wealth over a worker’s lifetime.
Could accumulate.
It is certainly true that people who take risks can end up very well off. The economic winners in our society are often described as risk takers. But there is no guarantee. Far from it. In fact, if getting wealthy through investing were a sure thing, there wouldn’t be any risk. If that were the case, it might fairly be said that anyone who didn’t do it would have only himself or herself to blame.
He continues:
Given the government’s performance, the idea of investing on your own does have its appeal. Do it right and you may get rich, which you certainly won’t off Social Security.
But that is not the point of Social Security. It’s not a lottery ticket. Neither are employer-sponsored pensions. Instead, they are part of the social safety net that has been built up since the Depression to try to keep the elderly out of poverty.
The nation seems bent on transforming both pensions and Social Security into high-risk, high-reward systems in which the clever and the lucky thrive and the unlucky and unsophisticated are left behind.
I am not an expert on the social security reform proposal, but here’s a simple question for the critics of the “risky social security scheme”. Every 401(k)-type plan in which I have ever had the opportunity to participate offers as one of its investment options money market accounts, which are essentially risk-free and return modest rates of interest. I have seen comparisons of Social Security with the stock market, and the stock market wins over time hands-down. I have not seen any rigorous comparisons with money market accounts, but given the return on Social Security, surely it must be similar.
More fundamentally, if we assume that as part of the social security reform proposal, money market-type accounts are one of the available options for investing, then what’s the problem? Workers won’t be forced to take any substantial risk that they don’t want to take and there seems to be nothing stopping them from taking the low-risk, low-reward path if they want to. Am I missing something here?
Update:
Mark A.R. Kleiman has a thoughtful response to my query. In a nutshell, he observes that the difference in risk is that between a defined benefit and defined contribution plan. True enough. But leaving aside for the moment whether Social Security is viable as a long-run defined benefit plan (which is the nub of the issue, of course), Kleiman’s response seems to me to be somewhat different from the one I posed. As I understand Kleiman, and other critics (Crenshaw also suggests this), the criticism is primarily one that a more autonomy-based Social Security system would be less redistributive than the current system–i.e., the current system gives more or less the same basic benefit package regardless of income, whereas the alternative ties results more to the income and decisions of the individual investor. In short, it is an argument that people should not be forced to choose between a high-risk, high-return investment strategy versus low-risk, low-return. Lower income people, or those with less job stability should get a lower-risk, higher-return versus higher income earners. This is a reasonable goal, that I certainly acknowledge and respect. But it strikes me as a concern about the redistributive nature of the system rather than the riskiness of the investments individuals would be forced to bear.
And all that, of course, is premised on the assumption that Social Security really is a low-risk defined benefit plan in the long run, an issue on which I certainly have nothing new to add, as well as the more risk tradeoffs between defined benefit and defined contribution plans generally.
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