Alan Reynolds

New York Times columnist Daniel Altman wrote about "Taxes and Consequences" after the election, fearing all prospective changes in the status quo. His complaints with allowing young workers to put part of their Social Security tax into personal savings accounts were stupendously supercilious. He demanded to know "who would choose where workers could put their money?"
 
The elitism here is obvious. Like other New York Times employees, Altman has a 401(k) retirement savings plan. So, who gets to choose where he puts his money? He does, of course. So, why does Altman presume other people are too stupid to make such choices? It's their money, after all.

 He wonders, "What would happen if financial markets crashed?" It is considered polite to say, "There is no such thing as a stupid question." But this particular question has to be an exception. He makes it sound as though retirees are obligated to liquidate their lifelong retirement savings on the day they empty their desks, and would be most eager to do that during a market crash.

 But anyone who cashed-out a retirement savings plan in such an untimely way would have to pay income tax on that lump sum, often at a high tax rate. Prudent retirees instead avoid touching tax-deferred plans until age 70-and-a-half, when they are legally required to begin taking the money out. Only academics who ask stupid questions would even think of rushing to liquidate life saving during a cyclical crash such as 1933 or October 1987, which were excellent times to be buying.

 The money invested in any retirement saving account goes in over many years and comes out over many years. What the stock or bond market happens to be doing during the year one begins retirement tells the retiree almost nothing about the next 10 or 20 years. The stock market rarely stays down for more than three years, and then typically rebounds quickly (as in 1983 or 2003). Meanwhile, the value of bonds often rises in recessions when stocks fall (as in 2001).

 Under a partly privatized Social Security system, potential retirees' incentives to tap the retirement account slowly would be similar to existing 401(k) plans. Unlike old-fashioned Social Security, there would be no artificial incentive to retire prematurely at age 62 or 66, because the longer you keep investing in your own account the more comfortably you can retire or partly retire whenever you choose.


Alan Reynolds

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