by hilzoy

From the AP:

“Wall Street turmoil left John McCain scrambling to explain why the fundamentals of the U.S. economy remained strong. It also left him defending his support for privately investing Social Security money in the same markets that had tanked earlier in the week.

The Republican presidential nominee says all options must be considered to stave off insolvency for the government insurance and retirement program, and top McCain advisers say that includes so-called personal retirement accounts like those President Bush pushed in 2005 but abandoned in the face of congressional opposition.”

I’ll bet he’s scrambling. I can’t imagine anyone would accept the idea of investing their Social Security pension in the stock market with equanimity right now. Even after Thursday’s and Friday’s rallies, with the DJIA close to its previous levels, the rate of return on the DJIA since the state of the union address in which the President proposed instituting private accounts is around 2% a year, well below the rate of inflation. A couple of days ago, it would have been well below that. And the actual rate of return on an individual account would have been lower still, given administrative costs and so forth.

This is exactly why we all went to the mattresses for Social Security back in 2005. No one’s basic retirement security should be at the mercy of the stock market. We have just been reminded why that’s such a stunningly bad idea. Apparently, the only people on earth who haven’t figured it out are John McCain and his advisors.

I hope the Obama campaign repeats this every day from now until the elections.

Besides that, “top McCain advisors” are repeating another complete myth: that personal retirement accounts are a way to “stave off insolvency” for Social Security. If political journalists knew more about policy, McCain’s “top policy advisors” might not have been able to complete the interview, because the reporters would have been laughing too hard. A statement like “all options must be considered to stave off insolvency for the government insurance and retirement program, and (…) that includes so-called personal retirement accounts” is, in fact, on a par with saying something like: “all options must be considered for making people healthier, including encouraging them to start smoking, operate chain saws while drunk, and take long, luxurious baths with their electric appliances.”

It really is exactly that dumb.

Any plan that allows Social Security tax revenues to be diverted into private accounts blows a hole in the Social Security budget. How much of a hole depends on the specific provisions of the plan: how much it allows recipients to divert, whether it tries to save money by other means, like benefit reductions, etc. You can see estimates of the effects of several different plans here. They all make Social Security less solvent, not more, and by trillions of dollars. (The President’s plan — the one McCain campaigned for — would add a cool $17.7 trillion in debt by 2050.)

Why? A few months ago, I drew up some goofy pictures to make the point as simply as possible. Since this issue has popped up again, I might as well put them up again. Here’s the present system:

Under the present system, younger workers, on the left, pay for the benefits enjoyed by older workers, on the right. In time, the younger workers’ benefits will be paid by today’s toddlers.

Here’s the proposal that John McCain thinks will make Social Security more solvent:

Here, the workers keep their own money, leaving Mr. Scream, who had paid the generation that came before him and been counting on being paid by younger workers in turn, with nothing. (Obviously, you can alter this picture in various ways. For instance, if people divert part, but not all, of their FICA taxes to private accounts, Mr. Scream can say: “Where’s that part of my money?”)

McCain has promised that Mr. Scream will, in fact, get his money. That money is the hole that private accounts blow in the deficit. If we don’t want to leave Mr. Scream with nothing, the money has to come from somewhere, though: from the Social Security Trust Fund, higher taxes, or possibly Santa Claus.

You might wonder: since we, as a nation, have just bought a large insurance company, and are considering buying hundreds of billions of dollars’ worth of toxic debt, is this really a good time to take on a project that adds trillions more to our national debt? Maybe not. But I’d be a lot happier if I thought that McCain knew that his Social Security proposal would actually cost money. The fact that he thinks it’s a way of making Social Security more solvent is pretty scary.