Fact-Checking Attacks on Personal Accounts

May 14, 2000

Following the introduction of the Bush administration's presidential commission on Social Security reform, Democratic leaders in Congress quickly moved to the attack. Some of their arguments are worth recounting here. Here was Senate Minority Leader Tom Daschle's (D-SD) reaction:

What that means, if you're 35 years old today, that means that you are guaranteed to lose 20 percent of your Social Security benefits by the time you retire. That's what this means. What it means is, that you are going to put your retirement funds at risk. I would ask anybody, a year ago, if you had the choice of investing in your Nasdaq account or investing in Social Security, which of those two accounts would be better today, which would be stronger? There is no doubt in our mind that a Social Security account over the last year would have been far stronger. …But what we say today and tomorrow and every time we take this issue up is, don't mess with Social Security. Don't mess with it, don't destroy it. It's worked for all these years. It's guaranteed to work in the future.

This statement is so misleading on so many levels that it deserves parsing. First, Sen. Daschle claims that a 35-year-old worker is guaranteed to lose 20 percent of his benefits under a Bush partial privatization plan. What he fails to mention is a) under the current system, underfunded by more than 25 percent, that same worker will lose even more; and b) that workers would have personal accounts with potential to more than make up the reduction in government-provided benefits. These benefits are forgotten.

Next, the Minority Leader asks which would have fared better over the last year, a Nasdaq account or a Social Security account. This is deceptive because a) no personal account plan proposed in Congress would allow workers to invest directly in the risky Nasdaq, only in broader stock indices; b) what matters is not the past year but the total lifetime return, on which basis a worker investing in stocks (be it the Nasdaq, the S&P 500 or any another index) would have outperformed Social Security by a factor of three; c) a worker nearing retirement would have only about third of his assets in stocks and would not have lost money in the past year, because bond price gains would have outweighed stock losses; and d) there is no such thing as a Social Security "account' in the first place.

Finally, Sen. Daschle argues that stock investment would "destroy' a system that is "guaranteed' to work in the future. But back in 1996, Daschle said:

I think you can make a strong case that if we would have invested all of the money in the market beginning in the '30s, the trust fund would be dramatically higher ... than it is right now. What I support is taking some of the trust funds and diversifying the portfolio to allow for the investment in nongovernmental securities. I think that would add to the return on investment. I think it would, over the long term, allow for an even greater opportunity for us to deal with what we know will be the inadequacies of the trust fund down the road.

The "non-governmental securities' Daschle supported investing in are of course stocks.

When confronted with this quotation on ABC News' This Week and asked it he had changed his mind, Daschle replied:

Not at all. What I--what I hope I was saying there and what I've always meant to say, if I haven't been as clear, I apologize, but I--I think it's been very clear from the beginning. We recognize the importance of using the market. What we want to do is to ensure that--that we separate the--the trust fund itself. Now I have suggested in the past that we could take on a test pilot project basis a small portion and--and allow the system to invest in the market.

When this position on stock market investment is clarified, we will let you know.

Finally, Social Security is not, as the Minority Leader claimed, "guaranteed to work in the future.' In fact, unless the program is reformed it is guaranteed not to work in the future: it already demands an eighth of a worker's wages, pays him a rate of return lower than he could receive from a passbook savings account, and still the program's trustees show it to be underfunded by over $22 trillion.

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