Myth illogical

The AARP claims to represent us seniors, but more often it just lectures us relentlessly. One such sermon in the AARP Bulletin, opposing any addition of choice and ownership to Social Security, boasted “groups like AARP that oppose [privatization] will spend millions of dollars to sway opinion.” Apparently, it plans to waste thousands of words, too, and without much concern about accuracy.

When it is not trying to sway our opinion against the White House, AARP tries equally hard to sell us various financial services, in exchange for big kickbacks. The latest AARP Magazine contains a record number of annoying insert ads that fall on the floor when you pick it up. They advertise, among other things, AARP Auto Insurance from the Hartford, AARP Life Insurance from New York Life, AARP health insurance from United Health Care and mediocre mutual funds from Scudder. If Eliot Spitzer is still obsessing about “conflict of interest,” perhaps he should take a look.

AARP Magazine features “Myths and Truths About Social Security” by “the magazine’s Social Security expert” Karen Westerberg Reyes. I was not surprised to find their expert audaciously redefining truths as myths and myths as truths.

Even the undeniable truth that “private accounts will give individuals more control” is magically redefined as a myth. Why? “People already have control over their money when they invest in private pensions, IRAs and 401(k) plans.” Well, some people have employer-provided pensions, but most do not. Many could invest in an IRA but need to save for other reasons (the kids’ college or down payment on a home).

It is difficult to save much after 12.4 percent of their paychecks go into a Social Security slush fund to be distributed in ways politicians find expedient. Unlike any personal savings, individuals have zero control over Social Security. They can’t even draw it down more quickly in a terminal illness. They get nothing if they die early.

AARP takes the easily demonstrable truth that “individuals will get higher returns with private accounts” and somehow redefines it as a myth without mentioning a single fact.

Since 1900, the average return on stocks was 6.3 percent a year, according to the Bridgewater Group, but only 1.4 percent on U.S. bonds. Rather than mentioning such bothersome facts, the author alleged: “In the current Social Security system, the risk is near zero…. That’s because U.S. Treasury bonds don’t crash when the stock market does.” That condenses several myths into just two sentences.

Anyone who tells young people there is “near zero risk” of a very bad deal from Social Security is a sham fortuneteller. The future return will depend on the payroll tax, the age at which benefits are paid, the formula for determining benefits and how benefits are taxed. All four variables have been changed many times — always toward making younger people pay more and get less — and much tighter squeezes are being proposed as ways to “save” Social Security (at the expense of younger Americans).

Social Security never guaranteed anyone anything. To prove that, AARP advocates what the author mythologizes as “small adjustments” or “a tune-up.” In truth, these “adjustments” involve raising taxes and reducing benefits, thus reducing the return. Nobody knows whose taxes will be raised the most and whose returns cut, so the political risk from Social Security is far more unpredictable than the market risk of investing in a balanced mutual fund.

The risk of a negative return on Social Security taxes is very high for younger college-educated people who work too many years and save too much, because they will be seen able to “afford” higher taxes and not “need” benefits.

The AARP writer’s second big myth was that the Social Security risk is near zero is “because U.S. Treasury bonds don’t crash when the stock market does.” That statement is a mixture of myths within myths.

Nearly all Social Security taxes fund an immediate transfer payment from workers to pensioners. True, the ephemeral surplus will collect a little interest income for a few more years, but the amounts are trivial compared to payroll taxes.

The claim that Treasury bonds do not crash “when the stock market does” implies a dangerous myth — that Treasury bonds have never crashed. In reality, the value of bonds goes down whenever interest rates go up. The yield on 10-year Treasuries rose from 6.2 percent in 1971 to 13.9 percent in 1981, for example, so Treasury bonds lost about half their nominal value during a time of high inflation.

In any event, the comparison between stocks and bonds is invalid because those choosing personal accounts would be allowed to invest in Treasury bonds, while Social Security will soon be too broke to do so.

Other myths rely on such unbiased sources as New York Rep. Charlie Rangel, former Clinton official Peter Orszag and some indecipherable gibberish from gadfly Barbara Kennelly.

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