PolitiFact Whiffs on Social Security

PolitiFact has a habit of missing the point, usually in a way that favors the left’s agenda. A good example is found in PolitiFact’s recent assessment of statements made by Herman Cain about privatizing Social Security:

During Monday’s Republican presidential debate in Manchester, N.H., former pizza executive Herman Cain touted an alternative to Social Security that has been operating for three decades in Galveston County, Texas.

“The city of Galveston, they opted out of the Social Security system way back in the ’70s,” Cain said. “And now, they retire with a whole lot more money. Why? For a real simple reason — they have an account with their money on it. What I’m simply saying is we’ve got to restructure the program using a personal retirement account option in order to eventually make it solvent.”

We’ll give Cain a pass on a pair of minor errors — it’s Galveston County, not city, and the program launched in 1981, not in the 1970s. Instead, we’ll cut to the bottom line: Has the program meant that participants “retire with a whole lot more money” than they would under Social Security?…

In 1981, employees of Galveston County — as well as those in two adjoining Texas counties, Matagorda and Brazoria — voted, after lengthy presentations and discussions, to withdraw from Social Security and initiate a system of individual accounts to provide retirement, survivor and disability benefits. Participants would contribute to their retirement accounts, supplemented by an amount from their employers, and those funds would be invested in annuities through a financial-services company chosen by a county-run bidding process….

…The Galveston plan is somewhat analogous to a 401(k) plan — that is, a plan designed to encourage workers to save for retirement — rather than a social insurance, or safety-net, program like Social Security….

Keith Brainard, the research director for the National Association of State Retirement Administrators, agreed that the Galveston plan is better for some types of workers, including those with long tenures.

But the “problem,” he said, “lies in Cain’s implication that Social Security should be a wealth-producing vehicle, when that’s not what it’s supposed to be. Social Security is supposed to be old-age insurance. That should be the emphasis of the program, not ‘retiring with a lot more money.’”…

…[T]here are some advantages to the Galveston plan — not just to the higher earners who get more out of the program, but also to the government entity running them. The Alternate Plan doesn’t face the same kind of long-term fiscal challenges that Social Security does, because it only promises participants the investment returns for the money they pay in to the system.

The downside, of course, is that the investments may not perform well enough to exceed what Social Security would have provided….

This is all misguided hogwash. I rate PolitiFact’s analysis as “wide of the mark.”

Social Security (SS) is neither a retirement plan nor insurance (as one interviewee calls it). Social Security is a transfer-payment scheme — some, rightly, call it a kind of Ponzi-scheme. It’s not fraudulent in intent, but it’s fraudulent in effect.

Today’s SS beneficiaries are not reaping returns from investments made by SS with their “contributions.” Their benefits come from the paychecks of today’s workers. And future SS benefits will come from the paychecks of future workers. (If you believe in the SS trust fund, which is nothing but a pile of IOUs, you must believe in the tooth fairy.)

Private retirement plans (and the occasional government plan, like Galveston’s) reap real returns and support economic growth through the purchase of corporate equities and securities. SS, on the other hand, inhibits economic growth by depriving workers of money that they could invest in equities and securities. Comparing real returns on private plans with the “returns” that Social Security extracts from workers is as meaningful as the proverbial comparison of apples and oranges.

There just ain’t no “returns” on SS, so it can’t be compared with a retirement plan that reaps real returns and contributes to economic growth in the process. SS can generate any kind of “return” that its political masters desire — because they have the power to extract the “returns” from workers’ paychecks.

Related posts:
Social Security Is Unconstitutional
Why It Makes Sense to Privatize Social Security
P.S. on Privatizing Social Security
That Mythical, Magical Social Security Trust Fund
The Real Social Security Issue
Social Security — Myth and Reality
Nonsense and Sense about Social Security
More about Social Security
Social Security Privatization and the Stock Market
Social Security: The Permanent Solution
Social Security Transition Costs, in a Nutshell
A Market Solution to the Social Security Mess?
Saving Social Security
The Bowles-Simpson Report
The Bowles-Simpson Band-Aid

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4 comments

  1. If you’re saying that PolitiFact makes it sound like Social Security makes investments on behalf of individual beneficiaries then I have to disagree. Their wording was within reasonable bounds: “what Social Security would have provided.”

    But I vigorously agree that PolitiFact missed the point. Cain was talking about funding the benefits. With a pay-as-you-go (Ponzi) system of finance an individual does not have his retirement financed at the moment of retirement. Later workers finance that retirement. That was manifestly Cain’s point and PolitiFact whiffed on that big time.

  2. My objection to the PolitiFact article is entirely in line with yours. I was not saying “that PolitiFact makes it sound like Social Security makes investments on behalf of individual beneficiaries.” But, now that you mention it, PolitiFact did just that, though in a subtle way.

    PolitiFact’s entire discussion of Social Security piggy-backs on the well-known fact that SS does maintain individual accounts, and that SS benefits are indeed linked to the timing and amount of “contributions” to each account. Thus, in outward appearance, there is no difference between SS and a 401(k) plan. If SS were not a transfer-payment scheme, its adminstrators could pool the “contributions” of individuals and invest the money in various instruments, then credit the gains (or deduct the losses) from individual accounts according to the amount and timing of individuals’ “contributions” to their respective accounts. In that case, the main difference between SS and a 401(k) plan would be that unlike a typical 401(k), SS does not allow individuals to choose among broad classes of investment vehicles (investment-grade bonds, growth stocks, etc.). These background assumptions play into PolitiFact’s use of the phrase “Judging which plan provides a better payout,” where “which plan” refers to the Galveston plan and SS. The use of “payout” implies a return on an investment. A firm’s dividend payout ratio, for example, is the amount of dividends divided by net income for the relevant period. For another example, I am in the payout phase of my private retirement plan; that is, I am now receiving annuity payments, after having made (real) constributions during the accumulation phase.

    In any event, PolitiFact’s article is fundamentally flawed. Comparing real returns to investments in a 401(k) with the pseude-returns to SS “contributions” is like comparing the interest rate on a bank’s CD with the ill-gotten gains from a robbery of the same bank..

  3. “Comparing real returns to investments in a 401(k) with the pseude-returns to SS “contributions” is like comparing the interest rate on a bank’s CD with the ill-gotten gains from a robbery of the same bank.”

    Heh! Good line.

    It sounds like we agree. I’d concede that PolitiFact produces a hint of the impression that Social Security has individual accounts. I simply think the language is vague well on the forgivable side. The overall story was unforgivably poor, on the other hand. Nice blog. Glad I visited, and I expect I’ll be back from time to time. Cheers.

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