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Stock return slightly better than Social Security payout


YOU HEAR it over and over again, a steady drumbeat on the brain. Social Security gives you a puny return on your money. Your return would be miles higher if you could invest your payroll taxes in stocks.

There's just one little problem. These drummers are making false comparisons. They use one kind of calculation for Social Security (one that weighs it down) and a different one for private investments (one that buoys it up).

Why would they misrepresent? If their case for private accounts is as strong as they say, why don't they tell the story straight?

It's possible that some supporters of private plans don't understand the "investment returns" they throw around. I wondered that about Rep. Jennifer Dunn, the Washington state Republican.

She appeared for an opening statement at a four-hour national forum Jan. 23 called "What Every Woman Should Know about Social Security."

I moderated the subsequent discussion, which was picked up by 61 cable TV stations and included active participants in 14 cities. The event was organized by Americans Discuss Social Security (ADSS), a nonpartisan educational group sponsored by the Pew Charitable Trusts.

Dunn told viewers that, if you were born in 1950, you get "2.2 percent from the investment that's made on your behalf by the government in T-bills."

Well, um, not quite.

The Social Security trust fund is invested in special Treasury bonds. The fund as a whole is currently earning 7.5 percent, thanks to the high-interest bonds it secured many years ago. New bonds are earning 6.6 percent.

Most people are astonished to hear that the trust fund earns that much. They've been brainwashed by the drummers who claim that it earns almost nothing at all.

Dunn didn't pull that 2.2 percent "return" out of the air. It's a 1995 number, computed by Social Security's actuaries, that compares the payroll taxes paid with what people get in benefits.

Dunn's office scrambled to assure me that that's what she really meant. Dunn herself didn't return my calls.

I see two possibilities. Either she didn't understand what she was saying, or wanted to make Social Security sound bad.

In any event, her spokesmen say it doesn't matter: that 2.2 percent return stacks up badly against stocks, whose long-term gain Dunn put at 7 percent.

But that's a false comparison, "like comparing apples with oranges," said Jane Ross, Social Security's deputy commissioner for policy, who followed Dunn on the ADSS panel. Here's why:

Most of the Social Security tax you pay today goes toward current benefits -- for retirees, widows, orphans and the disabled.

When Dunn says you could earn 7 percent in stocks, she isn't counting the cost of paying the benefits already on the books. She's pretending that all of your payroll tax could be put in a private account (and that you'd put it all in stocks).

Fine. Let's say that's done. Where does the money come from to pay current benefits for the next 30 years?

Her office says "pay from the budget surplus." But at present, the surplus is due entirely to the size of the Social Security trust fund. It's committed to benefits already. What big new source of income would Dunn suggest?

Social Security's actuaries have looked at a number of reform proposals, including several versions of private Social Security accounts. They projected the returns, under various scenarios.

Unlike Dunn, they assumed that -- even with private accounts -- you'd continue to support current and future beneficiaries.

And guess what? Under that assumption, the returns from privatized systems are in the same ballpark as Social Security's returns.

In many cases, you might even get less from the privatized plans than straight Social Security might pay. That's because, in privatization plans, Social Security benefits go down.

The payroll-tax money diverted into your private account is supposed to make up for the benefits you lost. But according to the actuaries' report, it often doesn't work that way.

Dunn uses Social Security figures to show that the system yields a low return on your payroll taxes. She ignores the comparable figures that show low returns from private accounts, too, after the cost of supporting beneficiaries is figured in.

The case for private accounts isn't as strong as you might think. That's what the privatizers don't want you to know.

Pub Date: 2/08/99

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