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Knowing that I'm a raving anti-entitlements nut, my liberal father-in-law recently sent me this link to get my goat:
Commentary: Social Security healthier than your 401(k)
Munnell makes three major points in the article:
It seems to me that it would be more appropriate to compare income from 401(k) accounts, rather than asset prices, to the present regularity of entitlement payments. However, the first point is valid, which is that so long as payroll tax revenue exceeds Social Security benefits, the federal government can better guarantee the regularity of retirement payments than an individual who must rely upon income from dividends, interest, and the sale of securities.
Where she goes astray is in assuming that the Trust Funds will pay out. In that respect, she is effectively comparing the real value of marketable assets held in 401(k) accounts to the ficticious value of the government account series bonds held by the Trust Funds. You can sell the shares in your 401(k) to get money for retirement. Sale of those shares actually nets you money. In contrast, the bonds held by the trust funds merely represent a legal obligation for the government to pay money to the entitlement programs out of current general tax revenue – but their redemption doesn’t actually result in any net revenue to the government. Claiming that the Trust Funds will pay for Social Security is like writing yourself a stack of IOUs and then saying your retirement is fully funded because you hold obligations to pay yourself a bunch of money at a later date. The actual value of the Trust Funds depends entirely upon what the government is able to pay.
Or, as the Trustees say every year:
Since Medicare only just started collecting on its Trust Fund in 2008, there isn't really much of a history on which to base the premise that the federal government will actually be able to honor the obligations represented by the Trust Funds. Indeed, in light of data such as LargoWinch posted (in the select section) -- not to mention forecasts by the GAO -- it hardly seems likely that those obligations will be honored.
So, I think it's rather specious of Munnell to compare the performance of real assets to IOUs whose validity hasn't yet been tested.
Commentary: Social Security healthier than your 401(k)
The 2009 Social Security Trustees report released Tuesday provides a basis for assessing how each held up. On the one hand, assets in 401(k) accounts -- which are predominantly in stocks -- have declined in value by about a third, employers are suspending matching contributions, and millions of unemployed workers have seen their retirement savings efforts disrupted.
On the other hand, the Social Security Administration continues to send out monthly checks to 35 million retirees and their spouses, 9 million disabled workers and their families, and 6 million families whose breadwinner has died. In other words, the government system has proved to be much less fragile than the private system of retirement savings.
...
On the other hand, the Social Security Administration continues to send out monthly checks to 35 million retirees and their spouses, 9 million disabled workers and their families, and 6 million families whose breadwinner has died. In other words, the government system has proved to be much less fragile than the private system of retirement savings.
...
Munnell makes three major points in the article:
- the market value of assets held in 401(k) accounts has fallen
- social security payments have continued to be made during the market crash
- a 2% increase in payroll tax would cover the projected shortfall between benefits and what can be funded by the Trust Funds plus current payroll taxes
It seems to me that it would be more appropriate to compare income from 401(k) accounts, rather than asset prices, to the present regularity of entitlement payments. However, the first point is valid, which is that so long as payroll tax revenue exceeds Social Security benefits, the federal government can better guarantee the regularity of retirement payments than an individual who must rely upon income from dividends, interest, and the sale of securities.
Where she goes astray is in assuming that the Trust Funds will pay out. In that respect, she is effectively comparing the real value of marketable assets held in 401(k) accounts to the ficticious value of the government account series bonds held by the Trust Funds. You can sell the shares in your 401(k) to get money for retirement. Sale of those shares actually nets you money. In contrast, the bonds held by the trust funds merely represent a legal obligation for the government to pay money to the entitlement programs out of current general tax revenue – but their redemption doesn’t actually result in any net revenue to the government. Claiming that the Trust Funds will pay for Social Security is like writing yourself a stack of IOUs and then saying your retirement is fully funded because you hold obligations to pay yourself a bunch of money at a later date. The actual value of the Trust Funds depends entirely upon what the government is able to pay.
Or, as the Trustees say every year:
The combined difference grows each year, so that by 2016, net revenue flows from the general fund would total $369 billion (1.8 percent of GDP). The positive amounts that begin in 2016 for OASDI, and started in 2008 for HI, initially represent payments the Treasury must make to the trust funds when assets are depleted to help pay benefits in years prior to exhaustion of the funds. Neither the redemption of trust fund bonds, nor interest paid on those bonds, provides any new net income to the Treasury, which must finance redemptions and interest payments through some combination of increased taxation, reductions in other government spending, or additional borrowing from the public.
Since Medicare only just started collecting on its Trust Fund in 2008, there isn't really much of a history on which to base the premise that the federal government will actually be able to honor the obligations represented by the Trust Funds. Indeed, in light of data such as LargoWinch posted (in the select section) -- not to mention forecasts by the GAO -- it hardly seems likely that those obligations will be honored.
So, I think it's rather specious of Munnell to compare the performance of real assets to IOUs whose validity hasn't yet been tested.
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