Former House Representative and Wall Street derivatives trader Pat Toomey, who is the Republican senate nominee in Pennsylvania, has been having a hard time pinning down his own position when it comes to Social Security. He unashamedly supported President Bush’s failed push to privatize the system, praised the idea of personal Social Security accounts in his book (because “personal accounts lead to personal prosperity”), but then claimed “I’ve never said I favor privatizing Social Security.”
Despite his insistence that he “never said” he’s in favor of privatization, Toomey constantly talks up private accounts on the campaign trail. Last month, he poo-pooed those worried about introducing investment risk in Social Security, saying, “the big question is whether you’re bullish on America. If you think in the long run that America is not going to grow, is not going to thrive, then you should be worried about this approach.”
This week, in an interview with the editorial board of the Scranton Times-Tribune, Toomey again downplayed the riskiness of his proposal, saying that even though retirement funds would be subject to market ups-and-downs, “you don’t really have to worry about a fluctuation in the stock market”:
“I would argue that you don’t really have to worry about a fluctuation in the stock market because this is a 45-year period of time, and you are gradually transitioning out of stocks as you get older and get closer to the point where you need to draw on those funds,” he said. The stock market would rise and fall, but over 45 years an investor from a private account would end up ahead, he said.
Toomey argued that “there’s never been a 20-year period in our history where we haven’t had a positive performance in the stock market, much less a 40-year period,” so anyone subject to his scheme wouldn’t have to worry. However, as Center for American Progress economist Christian Weller noted in 2005 (before the financial meltdown of 2008), there have been plenty of sluggish periods in the U.S. stock market, and accounts need to earn above and beyond the rate of inflation just to stay in the black:
While the market has increased on average by over 6 percent over the past 75 to 100 years, it has also seen extended periods in which rates of return were well below or above that. The market can stay low for long periods of time. At its lowest point, it had an average rate of return over 35 years of 3 percent over inflation. Individual account holders would lose money under this scenario. They would owe 3 percent after inflation on their debt, but they could expect to earn only 2.9 percent after fees on their accounts.
Yes, the likelihood of the market staying low for decades is small, but privatized accounts mean that when a worker is born, enters the labor force, and reaches the retirement age — events that are entirely outside of his or her control — will have a potentially large bearing on the size of their Social Security payments. An analysis of private accounts done by Robert Shiller found that, “given an all-stock portfolio and typical stock market returns across the world’s 15 largest economies, a worker’s account would have negative returns 33 percent of the time.” And diversifying an account with other investments such as bonds actually increases the likelihood of a negative return.
Toomey portrays privatized accounts as a kind of risk-free investment, but that’s not the case. His proposal would introduce totally unnecessary uncertainty into Social Security.