RECENT fluctuations in the stock market have been used by some liberal politicians as a reason why Social Security should not be privatized. What if someone invests retirement money in the stock market, instead of in Social Security, and then retires at a point when the stock market is down?
Obviously, that retiree will not get as large a pension as if retirement had come when the stock market was up. But the relevant question is whether the pension will be greater or less than if the money had been left in the Social Security system. Retiring when the stock market is down may mean that your rate of return on your money is only double what you would have gotten under Social Security, instead of triple.
That is not a risk that should scare anybody, despite the endless repetition of the theme that privatizing Social Security is "a risky scheme." Leaving Social Security the way it is represents a much bigger risk.
Everyone concedes that there will not be enough money in the Social Security trust fund to pay the pensions that have been promised to the baby boomers when they retire. That is why there has been so much talk about how much of an increased burden it will be for younger workers to support the large numbers of retirees in the decades ahead.
What there has not been nearly enough discussion of is the reckless irresponsibility of those who set up a system where the promises vastly exceed the money set aside to keep those promises. Social Security was sold to the public as an insurance scheme but people who have insurance or annuities are financing their own individual benefits, not depending on the next generation to take care of them or their survivors.
The "insurance" myth is enshrined in the Federal Insurance Contributions Act -- the FICA item on paycheck stubs which shows how much has been deducted for Social Security. Twenty years ago, I was attacked on Meet the Press for saying that there was not enough money in the Social Security system to pay what people had been promised.
Now that we have come closer to the day of reckoning, everybody knows it. Nevertheless, the liberal politicians who created this risky pyramid scheme are now busy depicting all alternatives to it as risky. So long as the day of reckoning lies beyond the next election, they are not ready to do anything that would be an admission of what a monstrosity they created.
When financial crunch time comes for Social Security in the decades ahead, either the benefits are going to have to be cut or huge tax increases are going to have to be paid by the younger generation, to make up for the vast amount of money by which Social Security falls short of being able to redeem its promises.
Raising the retirement age is one of the politically easy and morally dishonest ways of cutting benefits. So is raising taxes on Social Security recipients. Raising taxes on those who are still working may not be nearly as easy, but that is some future administration's problem, as far as today's liberals are concerned.
Riskiness depends on what time horizon you have in mind. There is no question that stocks are more risky than bonds or bank accounts this year. But retirement money is not being put aside to be spent the same year. The real question is: What are the long-run risks?
When you are talking about money that is to be used decades after it was put aside, then stocks are one of the safest investments -- safer than bonds, safer than money in the bank and certainly safer than Social Security. Inflation alone steals the value of money put in a bank or invested in securities with fixed yields.
It is virtually impossible to find a 20-year period within the past half-century in which the stock market did not pay off better than Social Security. Obviously, you can find individual stocks that did badly but there is no need to invest retirement money in individual stocks, when there are mutual funds that invest in a cross section of stocks, in order to spread the risk.
Private investments represent increases in things that add to the country's real wealth -- factories, homes, power plants -- while Social Security money is spent by politicians as soon as it reaches Washington. Accounting sleight-of-hand conceals this difference but it is crucial. There will be more real wealth to support retirees when Social Security is privatized -- and it will belong to