Pat Lynch: Criticizes Social Security Privatization

HALT: Halting Arkansas Liberals with Truth

(Milton Friedman: The People did not want the Social Security Program)

Pat Lynch in his September 3, 2010 article in the Democrat Gazette article  notes that “Congressman John Boozman’s plan to privatize Social Security is similar to what President Bush proposed in 2005 and what Congressman Paul Ryan is advocating for this year.” Lynch uses this article to show how stupid this is for the financial future of the country. However, I will show how the free market could do a much better job than the government has in the past and will in the future.

In the October 27, 2010 Wall Street Journal in the article “Private Social Security Accounts: Still a Good Idea,” William Shipman lays out the facts:

Suppose a senior citizen — let’s call him “Joe the Plumber” — who retired at the end of 2009, at age 66, had been able to set up a personal account when he entered the work force in 1965, at the age of 21. Suppose that, paying into his personal account what he and his employer would have paid into Social Security, Joe was foolish enough to invest his entire portfolio in the stock market for all 45 years of his working career. How would he have fared in the recent financial crisis?

While working, Joe had earned the average income for full-time male workers. His wife Mary, also age 66, had earned the average income for full-time female workers. They invested together in an indexed portfolio of 90% large-cap stocks and 10% small-cap stocks, which earned the returns reported each year since 1965.

By the time of their retirement in 2009, Joe and Mary would have accumulated account funds, after administrative costs, of $855,175. Indeed, they would have been millionaires a few years earlier, but the financial crisis lost them 37% in 2008. They were unfortunate to retire just one year after the worst 10-year stock market performance since 1926. Yet their account, having earned a 6.75% return annually from 1965 to 2009, would still pay them about 75% more than Social Security would have.

What’s more, this model assumes that in retirement Joe and Mary switch to a lower-risk, conservative portfolio that averages a return of just 3%. Of course for young workers today, Social Security promises even lower returns of only 1.5% or less, given the actuarial value of all promised benefits. For many, the promised returns are zero or negative. And if Congress raises taxes or cuts benefits in order to close financial gaps — as everyone who rejects personal accounts effectively advocates — the eventual returns for young workers will be even lower.

It is a mathematical fact that the least expensive way to provide for an almost certain future liability is to save and invest in capital markets prior to the onset of the liability. That’s why state and local pension funds, corporate pension plans, federal employee retirement plans and Chile’s successful Social Security personal accounts (since copied by other countries) do so. It is sound practice.

And it’s why Mr. Obama is wrong to assert that personal Social Security accounts are “ill-conceived,” and why each of us should have the liberty to opt into one.

My father, Everette Hatcher Jr.,  has only once seen a presidential candidate.It was 1964 and it was the first time in his life that he was truly excited about a presidential candidate that did not play politics and said how it was. He drove down to downtown Memphis and heard Barry Goldwater speak at a train station.
My father later told me that he really was disappointed that the only  politician he ever got excited about lost by the largest landslide in the history of the nation up to that point.
One of the key issues in which the press mocked him on was his view to make Social Security voluntary and he also said that Social Security taxes would cost more than income taxes in most American households one day.  That day has come. I wish Goldwater’s idea had become law in 1964 which was less than three decades into Social Security. The next ten years the baby boomers will cause the amount of retirees on Social Security to go from 35 million to 70 million. If nothing is done now the system will eventually cause our taxes to climb from 15% to even higher levels. Barry knew what he was talking about.
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