William A. Alexander – 5/1/05

This page was last updated on May 1, 2005.

Private accounts’ returns iffy; William A. Alexander; Beaver County Times; May 1, 2005.

This is at least the third letter from Mr. Alexander opposing any Socialist Security changes other than tax increases.

Can someone explain the extreme fear expressed by folks like Mr. Alexander to giving workers the opportunity to choose how a small part of their Socialist Security taxes will be invested? Remember, it’s the worker’s money! He earned it!

Below is a detailed critique of the letter.

“Santorum’s, Hart’s and Bush’s Social Security private accounts use a 6 percent return.

“Most of us who have had control of a 401(k)/IRA (without professional management help) over the Bush years would disagree. I caution you that you need to remove your employer’s matching donations from any review of your 401(k); these funds added by the employer really distort your true return.”

[RWC] How do so-called “employer contributions” distort anything? If you did not contribute to the 401(k), you would not receive the “employer contribution.” As a result, the contribution is a legitimate part of your return.

“A new report indicates that the average 401(k)/IRA fund return by nonprofessional investors is 3.6 percent, not the 6 percent per the administration.”

[RWC] I did several Google searches and could find no reference to any report citing this data. I hate it when letter writers cite reports but conveniently omit their names and sources.

Actually, the 6% Mr. Alexander claims the Bush administration quotes is fairly conservative. In 2001, a Yale finance professor (Roger G. Ibbotson) calculated the stock market return from 1926-2001 was 10.7%, including inflation. BusinessWeek once claimed a return of 7% but provided neither a time period nor a source for the figure.

“This means that for anyone who is lucky or good and makes 6 percent, there were two people who made 2.4 percent or some other combination to achieve the 3.6 percent average. This new report confirms the argument that most non-professional or less knowledgeable investors do not make large gains buying and selling mutual funds.”

[RWC] Even if the 3.6% average is correct, it is nearly double the 1.8% - 2.0% “return” of Socialist Security!

“Also, the employer pays many mutual fund fees for 401(k) s. These subsidies would not exist for the government private accounts, and those added costs would further lower the returns.”

[RWC] Here’s what White House info says about this topic.

“The Social Security Administration’s actuaries project that the ongoing administrative costs for a TSP-style¹ personal account structure would be roughly 30 basis points or 0.3 percentage points, compared to an average of 125 basis points for investments in stock mutual funds and 88 basis points in bond mutual funds in 2003.

“The low costs are made possible by the economies of scale of a centralized administrative structure, as well as limiting investment options to a small number of prudent, broadly diversified funds.”

“All of us who do not achieve a 3 percent average return of our private account will have less from Social Security. The Bush plan depends on lowering the SS payments by 3 percent per year, and this amount, escalated for inflation, will be deducted from your private account when you cash in.”

[RWC] The last sentence is pure crap! The government will take no money from personal accounts. If you opt for a personal account, your Socialist Security “classic” check will be less, but the government won’t “deduct” anything from your personal account. That’s the point of the personal account; the government can’t touch it.

“If you were good or lucky and averaged higher, you would get more. The question is, can we stand to have a large portion of our seniors - say 30-40 percent - receiving much less at their time of retirement?”

[RWC] Let me get this straight. Because some folks won’t do as well as others, no one should have the opportunity to build a nest egg the government can’t touch?

When did the lowest common denominator become the guiding principle of the United States? Some people don’t vote. Does that mean the government should take away everyone’s right to vote?

Finally, Mr. Alexander has been ignoring the statements indicating that no one on Socialist Security would be below the poverty line.

“Certainly you would not want to retire so far this year; you would dramatically reduce your payments since the market is down.”

[RWC] Mr. Alexander clearly wants us to believe he knows something about investing for retirement, and then he makes another ignorant statement like this. Everyone, except perhaps Mr. Alexander, understands you gradually adjust your retirement portfolio as you approach retirement. You gradually change the risk profile so by the time you retire, you minimize your portfolio’s sensitivity to stock market volatility.

The proposed Socialist Security personal accounts plan already includes this, as quoted below.

“To protect near-retirees from sudden market swings on the eve of retirement, personal retirement accounts would be automatically invested in the “life cycle portfolio” when a worker reaches age 47, unless the worker and his or her spouse specifically opted out by signing a waiver form stating they are aware of the risks involved. The waiver form would explain in clear, easily understandable terms the benefits of the life cycle portfolio and the risks of opting out. By shifting investment allocations from high growth funds to secure bonds as the individual nears retirement, the life cycle portfolio would provide greater protections from sudden market swings.”

“Don’t forget that private accounts also raise the deficit by trillions of dollars that your children and grandchildren will have to pay off.”

[RWC] I have to chuckle when opponents to personal accounts talk about budget deficits and government debt. With few exceptions, these same people have no problem with deficits and debt as long as the government is recklessly spending taxpayer dollars. However, as soon as the reason for deficit or debt is allowing workers to keep their money, suddenly deficit and debt become important.

1. “TSP-style” refers to the federal Thrift Savings Plan (TSP), a voluntary retirement savings plan offered to Federal employees, including members of Congress. Background info is available at http://www.whitehouse.gov/infocus/social-security/200501/strengthening-socialsecurity.html.