Rosy Predictions, Small Disclaimers

Tuesday, May 03, 2005

Rosy Predictions, Small Disclaimers

Advocates of Social Security privatization insist that private accounts would "provide significantly higher rates of return" than the current system. But a recent Harper's Index -- the best single page in any magazine in the world -- offers the following tidbits on Social Security, including a reminder that not everyone would come out ahead with private accounts:
Year that the Social Security trustees in 1994 projected the program would no longer be able to pay out full benefits: 2029

Year projected by the trustees in 2004: 2042

Amount to which a San Diego defense analyst’s payments to Social Security had appreciated when he retired in 1994: $261,372

Amount to which he calculated they would have grown if he had invested in a Dow Jones index fund instead: $248,166
I'm willing to bet that many people would do better in a privatized system, but I think many others would not.

I always look for the disclaimers in rosy reports on privatization like this one, written a few years ago by Cato's Michael Tanner.

For example, Tanner argues that private accounts will outperform SS in a "dynamically efficient economy." Does the present U.S. economy fit that description? Some indicators, like construction spending, are positive. But, last month, orders for durable goods suffered their largest fall in 2-1/2 years, and job growth has become sluggish.

In his report, Tanner writes that the "most common method of estimating future investment returns is to examine historical trends ..." Indeed it is. But with increasing globalization placing new, unprecedented competitive pressures on the U.S. economy, the average rates of return on Wall Street over the past 50 years seem to be a flimsy basis on which to project returns over the next 50 years.

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