Elliot Spitzer Whiffs On Social Security Reform

There is one statement in Elliot Spitzer's Slate.com article on Social Security personal accounts that I fully agree with: "'We told you so' is just about the most annoying sentence one can utter." Sure is. Beyond that, though, Spitzer's argument that stock market declines over the past year just prove the foolishness of individual investing is pretty flaccid stuff.

Spitzer begins by simply highlighting that "Since Jan. 1, 2005, the year President Bush proposed the idea, the Dow Jones industrial average has dropped from 10,783 to around 8,000, a drop of more than 25 percent." Ok, but in the Bush plan older workers accounts would automatically switch to bonds beginning at age 55, meaning that most people retiring today would have had much less exposure to that falling market than younger workers.

Then Spitzer says that he will quantify the losses to today's retirees, "abeit roughly." Spitzer should have said albeit very roughly, since Spitzer relies for his numbers on a Fortune article by Allan Sloan that Sloan himself later retracted due to technical misunderstandings of how personal account plans would have worked.

In this recent post, I gave the results of a much more detailed simulation of personal accounts using historical market returns. The short story is that there is no historical period in which a worker holding an account for a full career would have failed to significantly increase his total Social Security benefits, including workers retiring today. Moreover, even workers who held an account for only a few years before retiring under today's market conditions would have experienced only tiny declines in total Social Security benefits.

Finally, Spitzer says, "as Paul Krugman has pointed out, the would-be privatizers make incredibleÑeven impossibleÑassumptions about the likely performance of the market to justify their claim that private accounts would outdo the current system." The basic argument here is that as a slow-growing workforce reduces long-term GDP growth, stock returns must be lower as well.

But here's the problem: first, it's not the "privatizers" who make assumptions regarding future stock returns, it's the non-partisan actuaries at Social Security and economists at the Congressional Budget Office. Second, as I showed in this blog post using historical data from sixteen countries over a 100-year period, the correlation between GDP growth and stock returns is statistically very weak.

There are plenty of good arguments to make against adding personal accounts to Social Security. Spitzer should have spent more time actually making them.