AARP And Add-Ons

David Hogberg

Regarding my Spectator article this morining, the following was in the comments section on my blog:

The problem with your criticism of the AARP's selling of mutual funds is that it makes the common mistake of comparing programs which are built on top of, in addition to, and in compliment of the guarantees of social security with programs that are meant to replace it. Just because it is a good idea to take risks with a certain fraction of my wealth does not automatically mean that it is a good idea to risk more (or even less) of my wealth. This is a criticism that people with understandings in financial behavior would not make.

The first problem with that argument is that it misses the point of my criticism of the AARP. It’s that the AARP compares investing in the stock market to gambling—i.e., risk taking in which you are near certain to lose in the long run. If that's true, then it is legitimate to ask why the AARP offers mutual funds to their members. Isn’t AARP just making money by putting their members’ money at risk? But the fact is you are not certain to lose in the long run by investing in stocks, and the AARP knows this. Second, the Social Security is not a “guarantee.” Congress has the power to change the benefit structure as it did back in the late 1970s from a system based on price indexing to one based on wages. So what Social Security promises under current law could be changed at some point in the future if Congress decides to change the law. The reason reform opponents keep calling Social Security a guarantee is that they don’t want you to think about the Social Security system as having risks. But it does. If we keep the Social Security system in its current form of a wealth-transfer system, there is the very real risk that you will face tax increases to keep the system going. There is also the very real risk that you will face benefit cuts to keep the system going. In both those case, you lose money. So if we’re going to bring up the risk of losing money in the stock market, let’s compare it to the risk of losing money under the current Social Security system. And while we are at it, let’s compare the history of the stock market with the history of how Congress has “fixed” Social Security. Number of times the stock market has lost money over a twenty-year period: 0. Number of times Congress has raised the payroll tax: 20. I know which risk I’m willing to take. Finally, let’s address the issue of add-ons. Reform opponents always point out the transition costs of reforming Social Security. What about the transition costs of starting a system of add-ons? When you add the cost of starting up add-ons to the cost of maintaining the current Social Security system you’d get a total that is larger than the cost of reforming the system. As long as reform opponents seriously advance the notion of add-ons, that sound you’ll hear is their arguments about transition costs going right down the crapper.
Posted by David Hogberg on March 18, 2005 11:34 AM to Social Security Choice