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Risk and Return
Josh Marshall quotes a Wall Street Journal poll: "By 61%-32%, Americans say Congress should emphasize 'guarantees for the future' rather than 'more responsibility and personal control' in addressing Social Security." What's more, as he observes:
It's not too much to say that conventional wisdom in Washington and in elite journalistic circles generally (not to mention right-wing-radio-jabberdom) would suggest that those numbers should be reversed. The private accounts model is not only held to be more 'modern'; the assumption is that Americans are increasingly disposed to prefer greater risk in exchange for greater individual control and the possibility of gain.I think the Beltway CW is by no means wrong about this. People are prepared to accept greater risks for a chance of large rewards. The thing is that over the past two or three decades, the overall economy has already trended significantly in that direction. The right's take on Social Security seems to be that it needs to be eliminated in order to jumpstart some era of economic dynamism and flexibility. But we're already in that era -- Social Security is just a small effort to mitigate the increasing riskiness of American economic life.
February 17, 2005 | Permalink
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Comments
I think the Beltway CW is by no means wrong about this.
Forgive the obvious jab, but you do live in Washington, don't you?
The typical worker who has a dime to spare and is actually thinking about retirement already does have several accounts with personal choice. I've got a 401K I never rolled over from my old job, a 401K from my current job, a Roth IRA, and a life insurance policy that are all invested in different mutual funds. I'm not old enough to have built up a helluva lot of money in any of these accounts, but I've long since built up more choice than I can deal with, and it's pretty much the same across the white-collar world that no one seems to think of as Real America.
Sure, I want Social Security to form a large part of my retirement, but I'll probably be able to manage without it. I want it to be a guarantee for my fiancee's recently-divorced 52-year-old mother who's making $10 an hour at her first job in her adult life. She still has one kid at home and she's had to cash out a huge chunk of the equity on her house at a time in her life when she should ideally be close to getting the mortgage off her shoulders forever. For her and millions like her, if Social Security isn't a guarantee, she simply will not be able to retire. Or, more likely, she'll be moving in with us...
Anyway, choice is a great thing, but those who care most about it already have plenty of it. And almost everyone knows someone for whom some sort of guarantee is a necessity.
Posted by: ThatGuy | Feb 17, 2005 3:32:02 AM
The current system is not a 'guarantee' that you'll get anything when you retire.
It could be changed by any government between now and when you retire, or the money could run out, or you might choose to leave the country for any number of reasons.
Private investments avoid those problems. If the survey wrongly characterized the current scheme as a guarantee and it still got only 61% support, I'd say Bush has nothing to worry about.
Posted by: Nigel Kearney | Feb 17, 2005 5:09:44 AM
Last I heard, lotteries are still wildly popular. I used to harangue my employees that a lottery is a tax on people who are bad at math. That never stopped them. "It's my only chance to get rich", they countered.
Social Security works now, and given a prudent government it will work in perpetuity. There's an outside chance that we could handle medical care in like fashion. Most countries our size do.
Unfortunately, anything that departs from free market orthodoxy, no matter how successful, is outside the bounds of discourse, no longer politically correct.
Posted by: bad Jim | Feb 17, 2005 5:38:18 AM
Nigel Kearney:
Private investments avoid those problems.
Ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha ha!
I can never tell whether people who say things like this are lying, or are genuine idiots.
Posted by: Bleh | Feb 17, 2005 5:49:02 AM
It's not too much to say that conventional wisdom in Washington and in elite journalistic circles generally (not to mention right-wing-radio-jabberdom) would suggest that those numbers should be reversed. The private accounts model is not only held to be more 'modern'; the assumption is that Americans are increasingly disposed to prefer greater risk in exchange for greater individual control and the possibility of gain.
Of course, those in elite journalistic circles generally have the personal means to better withstand risk.
When was the last time you heard anyone on a cable news talk show advocating for the economic interests of a family making $40,000 a year?
Posted by: Petey | Feb 17, 2005 5:55:53 AM
It's quite simple really. People want risk in some parts of their lives and not in others. For example, I'm a rock-climber and I've jumped out of a plane before. But when I take the underground to work every morning I want to know it's as safe as possible. I'm perfectly happy paying more in taxes and fares to reduce the chance of a crash. The same is true with investment. The point about social security is once you get to old age, for most people there's very little you can do to get out of poverty - you're virtually unemployable, even if you are physically capable. People therefore want, more than anything else, to have a secure, liveable income at that time. It's nice if it's a large income, but the fact that it's there at all is the important thing.
Posted by: Ginger Yellow | Feb 17, 2005 6:00:44 AM
"People are prepared to accept greater risks for a chance of large rewards. The thing is that over the past two or three decades, the overall economy has already trended significantly in that direction. The right's take on Social Security seems to be that it needs to be eliminated in order to jumpstart some era of economic dynamism and flexibility. But we're already in that era -- Social Security is just a small effort to mitigate the increasing riskiness of American economic life."
Yes, and if you want to further increase trade integration, including the wider range of services now tradeable electronically, the US needs MORE income security for average families. If you are a free trader, your aim should be to INCREASE government social security payments to average retirees. The Democrats line on social security is too defensive, just stopping Bush's agenda - for reasons of both equity and to compensate for the rise in income variation over time, the Democrats should be campaigning to raise SS payouts.
Posted by: Otto | Feb 17, 2005 7:04:43 AM
People are prepared to accept greater risks for a chance of large rewards. The thing is that over the past two or three decades, the overall economy has already trended significantly in that direction.
This is simply not true. The overall economy has trended into the (natural) direction of greater risks/smaller rewards for ordinary people and smaller risks/greater rewards for the power elite. 'Law of the jungle' treatment for the workers - golden parachutes and welfare to corporate fat cats.
Posted by: abb1 | Feb 17, 2005 7:42:18 AM
I'd have to say this is the correct analysis.
Posted by: Chad | Feb 17, 2005 9:06:26 AM
Social Security is not a government program.
It is a communal program, that is one set up by the community for the benefit of the community.
It is administered by the government, in that the clerical tasks of collecting and disbursing funds are handled by a government department.
It invests its excess funds in government bonds as do many private pensions as prudent investments.
Perhaps if we started to refer to Social Security as a communal program we could clarify its function and replace some of the confusing analysis floating around.
Posted by: robertdfeinman | Feb 17, 2005 9:26:59 AM
I do not agree with your assessment of people's willingness to accept greater risk for a chance to make a large gain. I ran a small business for 20 years employing primarily high school grads making $25 - $45 grand a year. I pulled my hair out trying to get people to be more agressive in their 401K accounts. Even people in their 20's put their money in T-bonds. They would always ask,"Can I lose money if I put money in stock funds?" When I told them the truth but included why they should anyway, they had already tuned out and wanted nothing to do with risking their own money. Real people who are living paycheck to paycheck and paying the minimums on their credit cards are very averse to losing any money, period.
Posted by: Ted | Feb 17, 2005 9:27:28 AM
The current system is not a 'guarantee' that you'll get anything when you retire. It could be changed by any government between now and when you retire, or the money could run out, or you might choose to leave the country for any number of reasons.
Hee hee. So I guess the way to prevent any government from wrecking the system between now and when we retire is to hurry up and wreck the system right now. Makes perfect sense.
Posted by: JP | Feb 17, 2005 9:41:35 AM
re the WSJ poll: approximately the same 63% in favor of future govt guarantees v investment descretion as the 65% who want to cut benefits for the wealthy. that is the natural Democratic majority. it's a real shame the Party refuses to frame the issues in that manner, and now faces life as the permanent minority party.
Posted by: scorpio | Feb 17, 2005 10:04:29 AM
the assumption is that Americans are increasingly disposed to prefer greater risk in exchange for greater individual control and the possibility of gain.
I think this assumption was questionable to begin with.
During the dot-com boom, Americans increasingly... um.... disposed of their money in worthless stock offerings not because they were more comfortable with risk, but because many believed it was a can't-lose proposition. Once everyone adjusted to the reality that you can lose nearly everything, they started pulling out of investments just as irrationally as they invested in the first place.
As a homeowner, I hope we're not seeing the same thing with the housing boom, but there are certainly people who think that real estate is an honest to God, definitely can't lose this time proposition. In fact, a no-money-down mortgage on a $750k house is a huge leveraged investment that could in principle leave you with nowhere to live and a debt bigger than your annual salary. Do people accept these conditions because they are more comfortable with risk, or because they just haven't thought through the degree of risk?
It's rational to risk money in excess of what you need to live, because you do get a better return on average. But it's not rational to put the money you need in jeopardy. At least it's not rational on an individual basis. A hypothetical retirement strategy that resulted in 10% higher returns for 99/100 people but left 1/100 without enough to get by is essentially flirting with catastrophe. The reason people might accept this situation is usually not because they have given informed consent to a 1% chance of going broke. They do so because the human intuition is extremely bad at evaluating choices involving catastrophic risk.
Posted by: Paul Callahan | Feb 17, 2005 10:21:29 AM
Hmmm, please disregard my previous suggestions, now would not be a good time for *you* to consider joining the CIA (you might be disappeared!)
Posted by: jerry | Feb 17, 2005 10:32:30 AM
"the increasing riskiness of American economic life": anyone got any cites that support this assertion?
Business cycles are far less severe than they were in days gone by. Would anyone trade the last 20 years for, say, the Great Depression?
Posted by: ostap | Feb 17, 2005 10:33:10 AM
Robertdfeinman; “Social Security is not a government program.
It is a communal program, that is one set up by the community for the benefit of the community“
What an odd comment. SS is not voluntary, it requires the police power granted to government to enforce compliance.
Posted by: Robert Brown | Feb 17, 2005 10:35:41 AM
Another problem I have with the alleged American comfort with risk is that on the job front, this growing "comfort" is more likely just a diminishing availability of any kind of job security. If you actually offered someone the option of cradle-to-grave employment (or, more realistically, a five year contract), a seniority pay scale with guaranteed price-indexed raises, and a defined benefit pension, many people would consider that a good deal and give up opportunities for bonuses and stock options. Employers don't offer the former because they correctly perceive that the latter is a better deal for them.
Some people would of course prefer the risk--and it's a good thing that there are entrepreneurial types--but to say that the overall temperament of America is trending this way seems like a less likely explanation than the simple fact that the low risk alternatives are not being offered for comparison.
Posted by: Paul Callahan | Feb 17, 2005 10:36:58 AM
Scorpio: “re the WSJ poll: approximately the same 63% in favor of future govt guarantees v investment descretion as the 65% who want to cut benefits for the wealthy. that is the natural Democratic majority. it's a real shame the Party refuses to frame the issues in that manner, and now faces life as the permanent minority party.”
Democrates fear exposing SS as a welfare or income redistribution scheme for fear it will lose support in the future. I think they could possible make some short term political hay with a “soak the rich” strategy.
Posted by: Robert Brown | Feb 17, 2005 10:44:25 AM
Business cycles are far less severe than they were in days gone by. Would anyone trade the last 20 years for, say, the Great Depression?
Most people's personal risk is more closely tied to employment than to the business cycle. I think you'd have a hard time arguing that job security is now better than it was in the 25 years or so following WWII.
The risk that your hard-won skills are going to have virtually no economic value at some point in your own lifetime is higher than at any other historic period. I'm all for technology, and I'm cautiously optimistic that people can learn new skills. But let's not confuse the need to stay adaptable for a genuine heartfelt desire by most employees to reinvent their careers every half-decade or so.
Posted by: Paul Callahan | Feb 17, 2005 10:48:09 AM
The current system is not a 'guarantee' that you'll get anything when you retire.
It could be changed by any government between now and when you retire, or the money could run out, or you might choose to leave the country for any number of reasons.
Private investments avoid those problems.
Actually, no, it doesn't; nothing stops Congress, with the power to tax income "from whatever source derived", from slapping a 100% income tax on the proceeds from the private accounts except the same thing -- public pressure -- that stops them from voiding SS's existing promises.
"The law can be changed at any time, and you get screwed" applies to almost any conceivable plan.
Posted by: cmdicely | Feb 17, 2005 10:50:34 AM
"the increasing riskiness of American economic life": anyone got any cites that support this assertion?"
Try Google.
There have been numerous studies showing dramatically higher economic risk and fluctuation for the average household currently than there was in the pre-1980 era.
Posted by: Petey | Feb 17, 2005 10:52:32 AM
Some people would of course prefer the risk--and it's a good thing that there are entrepreneurial types--but to say that the overall temperament of America is trending this way seems like a less likely explanation than the simple fact that the low risk alternatives are not being offered for comparison.
Increased risk and opportunity over the past generation has been good for only a minority of Americans in the upper percentiles of the economic distribution. It's been a net negative for the majority.
However, this increased risk and opportunity has been good for the cumulative economy.
Squaring this circle involves using the government to provide a safety net, financed by the increased returns at the top.
This isn't rocket science, folks.
Posted by: Petey | Feb 17, 2005 10:58:05 AM
Paul, Petey: I asked for cites and got a couple of assertions. Got any cites?
Posted by: ostap | Feb 17, 2005 12:54:22 PM
Well, let's see. The abstract of the paper below seems to back up my perception once you realize that "job security" (going up says the paper) refers purely to the ability to stay employed, while the ability to hold onto one particular job is called "job stability." I'm certainly not going to deny that job opportunities were going up in the 90s, but this is not the same as being able to hold onto one job.
BTW, this is the word of the 2002 Bureau of Labor Statistics, which has an interest in painting a rosy scenario. But it's probably a reasonable starting point for sources of stats. What is undeniable (see figure 1) is that job switches (employment-to-employment transitions) have gone up steadily since 1975. (It would also be interesting to see the numbers from about 1950; starting at 1975 is basically starting from the darkest days of the post-industrial economy when there were mass layoffs in traditional industries).
http://www.bls.gov/ore/pdf/ec020050.pdf
I find that overall job separation rates changed very little over this time period, but that there were large changes in the component transitions. Employment-to-unemployment transitions declined dramatically, indicating a significant increase in job security. For men, nearly all of the increase in job security occurred in the 1990s, while for women, the increase was more uniform throughout the period. There was an equally dramatic increase in employment-to-employment transitions (job changes with two or fewer weeks of unemployment), indicating that it has become easier to change employers. I also examine trends in these transitions treating married couples as a unit. I find that job stability fell for married couples, but that job security increased. The decrease in stability would have been smaller and the increase in security would have been larger were it not for the increase in the proportion of couples in which the wife’s earnings are a significant share of total earnings.
Note: "I find that job stability fell for married couples, but that job security increased." Someone who is risk averse would certainly prefer job stability to merely being able to find another job more easily.
My main assertion was simply that job skills obsolescence is higher now than in the past. Do you really question this? Entire cottage industries like "desktop publishing" appear and disappear within a matter of years. No, I don't have stats handy right at this second. Anecdotally speaking, I really can't think of anyone who is actually working at what they trained to do in their youth.
Posted by: Paul Callahan | Feb 17, 2005 1:47:29 PM
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