There are any number of dishonesties and distortions trucked out to hide the essentially ideological nature of the stakes involved in the Social Security privatization debate. (If you want to see one of the more shambling and pitiful examples read this article.)
But one of the most enduring is the contention that Social Security makes about a 2% annual rate of return and that a privatized version of Social Security would make perhaps three times that rate -- in the neighborhood of 6% or 7% annually.
The idea is that Social Security is so ineptly managed because it's in the hands of the government rather than the market. But this is a classic example of an inherently dishonest analogy. One of the key reasons the "rate of return" for Social Security is low is that much of the money that goes into Social Security goes into payments that aren't strictly for retirement, but rather ones that buffer or spread around the risks inherent in life.
Let me give you an example.
When I was twelve my mother died, rather suddenly. She was thirty-seven.
On my behalf, for the next six years, and on my sister's behalf for the next fourteen years (i.e., until we were eighteen), my father received checks from the Social Security administration to help raise us.
I don't remember precisely but I think these checks were for a few hundred dollars a month for each of us. Maybe two-hundred something; I'm not sure.
At the time she died my mother was thirty-seven, so in theory she had been of working age for fifteen years. But for much of my childhood she either didn't work or worked part-time. So figure, rounding out, that there were perhaps ten years in which she was paying into Social Security, and all of those at relatively low-paying jobs.
I could run the numbers if I had more specific receipts and check-stubs here with me, but the point is pretty clear: Social Security paid out far, far more to my mother's minor children than she ever paid in. So her extremely high "rate of return" - to use what is obviously in this case a fairly misleading phrase - was very high and it pulled everyone else's down a bit.
Let's think for a moment about why this is.
The idea here isn't that her pay-in had accumulated such-and-such rate of return but that this was part of the money she would have put toward raising us had she not died (thus the cut-off at age eighteen). This is an ethical and public policy decision, not a market one. Not only could she not make that money, for obvious reasons. But the money she had paid in wasn't enough to accomplish very much. So what happened was that, under the rules of Social Security, a bit of everyone else's money was diverted toward her children, just as it routinely is for the surviving children of countless others around the country. A part of the financial consequences of her misfortune was spread out among everyone else. Social Security isn't just a big investment pool, it's also a social compact. Or, as public policy types would say, social insurance.
This is a good example of why the issues surrounding Social Security reform aren't really computational as much as they are social and ethical and ideological.
Social Security - as currently structured - represents a sort of nation-wide social compact against the vicissitudes and tragedies of our existence. We know that a certain percentage of us will die early with obligations to our children still outstanding, or we will become disabled and unable to work, and many of those down the income scale won't have made enough yet when they die to have built up funds of cash for their children. That's where Social Security comes in. Social Security isn't just a particularly poorly managed 401(k) plan it's a vast social program in which we share risk, or to put it more immediately, in which we collectively look out for each other.
When privatizers say you could get much better returns in privatized accounts one of the things they're saying is that this part of Social Security would just be dropped. That it's every man and woman for him or herself. That for widows, and the disabled, and orphans or kids whose parents die, that it's just tough *#$&. Or if your private account goes south? Well, that's tough #@$* too. (Not only is privatized Social Security not secure, it's also not social.)
Whether we should have the current kind of Social Security or the privatized version is a debate well worth having. But the privatizers are deeply committed to having the debate on dishonest terms.
Which makes sense, since it's probably the only way they can win.