Feature

Social Security Q&A

Separating Fact from Fiction

By Doug Orr

The opponents of Social Security will stop at nothing in their long crusade to destroy the most efficient retirement system in the world. Opponents have taken two tracks to attack Social Security. The first is to claim the system as it is will fail, and the second is to claim that privatization is a better way to provide for retirement security. The first claim was the favorite from 1935 to about 2001.Then the privatization claim became the vogue. Now the first is back on the table.

With corporations routinely defaulting on their pension promises, more and more workers must rely on their individual wealth to make up the difference. The stock market collapse at the turn of the millennium wiped out much of the financial wealth of middle class Americans, and the collapse of the housing bubble has wiped out much of their remaining wealth. Making any cuts to Social Security now, either by raising the retirement age or cutting benefits, would have a huge impact on their remaining retirement income and are not necessary to “save the system.” In fact, to make the most of the modifications currently being proposed by Obama's commission would be the height of folly.

With all the fear-mongering falsehoods flying around, it can be difficult to separate fact from fiction. Below, Doug Orr helps D&S readers do just this, with clear, and sometimes surprising, answers to many common Social Security-related questions.

—Eds.

Have opponents actually lied to the public about Social Security?

Yes. Former President George W. Bush repeatedly claimed that those who put their money in private accounts would be “guaranteed a better return than they would receive from the current Social Security system. But every sale of stock on the stock market includes the disclaimer: “the return on this investment is not guaranteed and may be negative” for good reason. During the 20th century, there were several periods lasting more than ten years when the return on stocks was negative. After the Dow Jones stock index went down by over 75% between 1929 and 1933, the Dow did not return to its 1929 level until 1953. In claiming that the rate of return on a stock investment is guaranteed to be greater than the return on any other asset, Bush was lying. If an investment-firm broker made this claim to his clients, he would be arrested and charged with stock fraud. Michael Milken went to jail for several years for making just this type of promise about financial investments.

In fact, under the former President Bush’s privatization proposal, a 20-year-old worker joining the labor force today would have seen her guaranteed Social Security benefits reduced by 46%. Bush’s own Social Security commission admitted that private accounts were unlikely to make up for this drop in guaranteed benefits. The brokerage firm Goldman Sachs estimated that even with private accounts, retirement income of younger workers would have been reduced by 42% compared to what they would have received if no changes were made to Social Security..

Former President Bush also misrepresented the truth when he claimed that Social Security trustees say the system will be “bankrupt” in 2042. Bankruptcy is defined as “the inability to pay ones debts” or, when applied to a business, “shutting down as a result of insolvency.” Nothing the trustees have said or published indicates that Social Security will fold as a result of insolvency.

Until 1984, the trust fund was “pay-as-you-go,” meaning current benefits were paid using current tax revenues. In 1984, Congress raised payroll taxes to prepare for the retirement of the baby boom generation. As a result, the Social Security trust fund, which holds government bonds as assets, has been growing. When the baby boomers retire, these bonds will be sold to help pay their retirement benefits.

If the trust fund went to zero, Social Security would simply revert to pay-as-you-go. It would continue to pay benefits using (then-current) tax revenues, and in doing so, it would be able to cover about 70% of promised benefit levels. According to analysis by the Center for Economic and Policy Research, a 70% benefit level then would actually be higher than 2005 benefit levels in constant dollars (because of wage adjustments). In other words, retirees would be taking home more in real terms than today’s retirees do. The system won’t be bankrupt in any sense. On this point, President Bush was “consciously misrepresenting the truth with the intent to deceive.” That is what the dictionary defines as lying.

I used to hear about having too few workers to support all the retirees in Social Security. Now I am hearing that argument again. It is true?

Opponents of Social Security have hated it since its creation in 1935. The first prediction of a Social Security crisis was published in 1936! The Heritage Foundation and Cato Institute are home to many of the program’s opponents today, and they fixate on the concept of a “demographic imperative.” In 1960, the United States had 5.1 workers per retiree, in 1998 we had 3.4, and by 2030 we will have only 2.1. Opponents claim that with these demographic changes, revenues will eventually be insufficient to pay Social Security retirement benefits.

The logic is appealingly simple, but wrong for two reasons. First, this “old-age dependency” ratio in itself is irrelevant. No amount of financial manipulation can change this fact: all current consumption must come from current physical output. The consumption of all dependents (non-workers) must come from the output produced by current workers. It’s the “overall dependency ratio”—the number of workers relative to all non-workers, including the aged, the young, the disabled, and those choosing not to work—that determines whether society can “afford” the baby boomers’ retirement years. In the 1960s we had only 0.62 workers for each dependent, and we were building new schools and the interstate highway system and getting ready to put a man on the moon. No one bemoaned a demographic crisis or looked for ways to cut the resources allocated to children; in fact, the living standards of most families rose rapidly. In 2030, we will have 0.98 workers per dependent. We’ll have more workers per dependent in the future than we did in the past. While it is true a larger share of total output will be allocated to the aged, just as a larger share was allocated to children in the 1960s, society will easily produce adequate output to support all workers and dependents, and at a higher standard of living.

Second, the “demographic imperative” ignores productivity growth. Average worker productivity has grown by about 2% per year, adjusted for inflation, for the past half-century. That means real output per worker doubles every 36 years. This productivity growth is projected to continue, so by 2040, each worker will produce twice as much as today. Suppose each of three workers today produces $1,000 of real output per week and one retiree is allocated $500 (half of his final salary)—then each worker gets $833. In 2040, two such workers will produce $2,000 real output per week each (real output adjusts for inflation). If each retiree gets $1,000, each worker still gets $1,500. The consumption levels of both workers and retirees go up. Thus, paying for the baby boomers’ retirement need not decrease their children’s standard of living. A larger share of output going to retirees does not imply that the standard of living of those still working will be lower. Those still working will have a slightly smaller share of a much larger pie.

So that means that there is not funding problem for Social Security?

Not exactly. When the Greenspan Commission (yes, the same Alan Greenspan who helped created the current financial crisis) raised Social Security tax rates in 1984, it claimed that this would solve the funding problem far into the future. Based on past experience that would have been true. Social Security tax revenues are based on the level of wages paid, and historically, real wages (wages adjusted for the effects of inflation) had been growing along with productivity. This is what mainstream economic theory tells us is supposed to happen. But starting in the early 1980s, real wages actually started falling, even as productivity continued to increase. By 2009, the average real wage was just $16.40 (in 2005 dollars), exactly the same as it had been in 1966. So while labor productivity is now more than twice as high, wages have stagnated. If the wage had continued to grow with productivity, the real wage in 2009 would have been $38.50, more than twice as much. If wages paid in 2010 were twice as high as they currently are, the revenues flowing into the Social Security system would also be twice as high. But stagnating wages have put a strain on the system..

How can we address the funding gap that some people claim is going to occur?

One change would be to remove the cap on the Social Security payroll tax. A second option is to follow the lead of other industrialized countries. Social Security funding currently relies on taxing only wage and salary incomes. Over the past three decades, as corporations have driven down the real wages of the vast majority (80%) of employees, the share of total national income going to wages and salaries has declined, and the share going to capital income (from financial assets) has gone up. This erosion of the wage share of total income has reduced the share of total income flowing into the Social Security system. The retirement systems of the rest of the industrialized world are funded out of general tax revenues. The logic is that everyone in society benefits from the efforts of workers, so all should contribute to the support of retired workers. In the two years after the end of the recession in 2001, real wages had gone up by only 2.8%, but corporate profits had gone up by 62.8%. If we expand the Social Security tax to cover all forms of income, the revenue from this vastly increased profit income would allow the tax rate on wages to be significantly lower. This would provide an enormous benefit to small businesses and the self-employed as well as to everyone who works for wages and salaries.

Are there other more creative funding ideas?

Yes, but Congress is not even discussing one key idea— a “speculation reduction tax.” When we buy a jacket, we pay a sales tax, but when a speculator buys a share of stock, or a collateralized debt obligation (CDO), or a credit default swap, they pay no tax at all. The current economic crisis in the United States was precipitated by massive increases in speculation in the financial sector of the economy in ever more exotic financial instruments. One goal of the ongoing re-regulation of that sector is to reduce this speculation. A speculation reduction tax could solve two problems at once. Many economists, both conservative and liberal, support the idea of a tax on speculation in the financial markets. This is often called a “Tobin tax” after one of its proponents. The tax rate would not have to be very high to have a big impact. The tax rate could go down if as the length of time the asset is held goes up. If a speculator buys a stock or CDO and holds it less than a day, the tax could be 5% of the selling price. If they hold it a week, it could be 2%. If they hold it a month it could be one percent, and so on. One recent estimate indicates that a flat rate of just 0.5% on all financial transactions would raise more than $145 billion per year, which is twice the size of the projected Social Security shortfall. If all of this revenue were dedicated to Social Security, the system would be solvent indefinitely. In fact the surplus in the system would be so large we would need to lower the tax rate on wages and raise the level of retirement benefits paid.

Former President Bush claimed the trust fund is just a bunch of government IOUs and therefore worthless. Is this true?

The trust fund does just contain IOUs, but they’re not worthless. If they are, someone should tell that to the very smart and very rich people, and the central banks of Japan, China, and many other countries that hold a large share of their assets in U.S. government bonds. When the trust fund was created in 1935, the law stipulated that any excess revenues coming into the Social Security system must be used to purchase federal government bonds. (At the time, the stock market had just lost over 75% of its value and was understood to be unsafe.) Federal bonds are absolutely safe; the government of the United States has never defaulted on any bond obligation. Former President Bush appeared to be ready to break this tradition. He appeared to want the Treasury to “selectively default” on the bonds in the Social Security trust fund. He obviously felt the United States doesn’t have to meet its obligation to the working people of America the way it meets its obligations to ultra-wealthy bondholders. His suggestion that the U.S. government might not be willing to repay its debt obligations was remarkable and for a time completely disrupted global financial markets.

What will happen when the assets held in the trust fund are needed to help pay for benefits?

The trust will start selling the bonds. Currently it has to sell them back to the Treasury, although the law could easily be changed to allow sales to the same people, institutions, and governments who were buying U.S. bonds this past year. But let’s assume the government has to buy them back.

If the government were running a surplus, as it did for the last four years of the Clinton administration, it would use that surplus to pay for them. If, on the other hand, the government were running a balanced budget but not a surplus, it would need to issue new Treasury bonds to pay for the bonds it would buy from the trust fund. In finance, this is called “rolling over” debt, and every major corporation in the world does it every day. At no point would the government need to roll over more than $300 billion in any given year to pay for the trust fund bonds. We already know the federal government can easily sell $475 billion per year in bonds, because it did that in 2005 and interest rates did not even go up—in fact, they remained relatively low.

So there’s no problem, right?

Actually, there is one thing that could cause a problem: the government running a massive deficit, as it started doing during the Reagan and George H.W. Bush administrations, and again in a much larger way under George W. Bush. In that case, selling more bonds could put a very real strain the financial system’s ability to absorb the creation of this new debt. If the government is borrowing massive amounts at the same time that private pension plans are selling assets to fund their pension promises and Social Security is selling assets from the trust fund, there is the potential for a very large increase in interest rates.

High interest rates slow economic growth by making it more expensive for consumers to buy homes or for businesses to invest in new infrastructure. But high interest rates also depress financial asset prices. A five-percentage-point rise in interest rates reduces the selling price of a bond that matures in ten years by 50%. In a 1994 paper, Sylvester Schieber, an advisor to former President Bush on pension and Social Security reform, predicted this potential drop in asset prices.

While this drop in financial asset prices would have little effect on the majority of Americans, it would have a huge impact on the wealthiest 0.5%. This is the issue that Federal Reserve chairman Alan Greenspan tried to raise in his last three years at the Fed. Greenspan said, “You don’t have the resources to do it all.” So he wanted to cut Social Security benefits to protect the asset values of the ultra-rich.

Even if the Social Security system isn’t going to go bankrupt by 2029, 2042, or 2058, won’t the Social Security trust fund begin cashing in the IOUs from the federal government as early as 2018?

The contributions to Social Security will become less than the benefits paid out in 2018, based on the trustees’ overly pessimistic assumptions. But that doesn’t mean that the Social Security Administration will need to start selling bonds. The interest income from the existing bonds will be sufficient to make up the difference until 2028. If the trustees’ pessimistic assumptions are true, they will need to start selling bonds in 2028 and the trust fund will be reduced to zero in 2042. At that point, as I mentioned above, the Social Security system would simply revert back to pure pay-as-you-go, operating just as it did successfully from 1936 to 1983.

Shouldn’t we consider benefit cuts today to help prevent a potential shortfall in the future?

Congress, correctly, has not been willing to cut benefits. They don’t need to, and they shouldn’t. Telling your kids today that they only get to eat one plate of rice each day and have to get their clothes at Goodwill because there is a chance that you might lose your job 40 years from now would be irrational. It would be equally irrational to implement benefit cuts immediately on the chance that the trust fund might go to zero in 2042—especially when future recipients would still be getting more in real terms than recipients do today.

Other economics writers, such as Newsweek’s Robert Samuelson suggest lowering benefits to wealthy people. Is this a good idea?

Lowering benefits just for the wealthy is also a bad idea. That’s like proposing that, after an accident, someone who drives a Lexus should only get half of the replacement value of their car, while someone who drives a Ford Focus should get the full replacement value. Social Security is a universal insurance system. This change would make the system less universal and pit one group of workers against another.

What would it mean to index Social Security benefits to prices rather than to wages as is done now? David Brooks of the New York Times and others say this would prevent the system from going broke.

Right now, the formula for Social Security benefits in the first year of retirement is based on an average of the worker’s wages over a 35-year period, accounting for productivity increases and for inflation. Productivity is figured in by adjusting the worker’s earnings by the change in average annual wages. In effect, the worker’s own 35-year average wage is recalculated as if it had been earned in the three years before retirement. The reason for this adjustment is simple: With more education and more and better machines, labor productivity (what each worker can produce in an hour’s time) rises. Thus, each worker produces more real output and, assuming that wages rise with productivity (which was true up until 1980), workers’ standards of living improve. If workers contribute more to society’s output, they deserve more in return. This is how market economies are supposed to work.

If productivity rises by 3% a year, the standard of living should go up by 3% a year. But what if inflation is also 3%? In that case, if wages rise by just 3%, workers would not be able to purchase any more real output than the year before. That’s why the wage increase must also be adjusted for inflation. To correct for this, wages would need to rise by 6% (3% for productivity and 3% for inflation).

When the opponents of Social Security proposed indexing initial Social Security benefits only to price increases, they were really suggesting stripping out the part of wage increases that result from rising productivity and only allowing for inflation. It’s the equivalent of linking your retirement benefits to the very first job you take, rather than the job you hold at retirement. It freezes your retirement standard of living at whatever the standard of living was when you entered the workforce. According to former President Bush’s Social Security commission, if this “price indexing” approach were implemented, future retirees would see their retirement income drastically reduced—if you retire in 2022, benefits would be 10% lower, in 2042, 26% lower, and in 2075, 54% lower.

Currently, once you retire, your benefit is adjusted annually for inflation but not for the change in wages. This cost of living adjustment (COLA), based on the inflation rate, helps maintain retirees’ standard of living at the level they had when they retired, although their standard of living slowly falls behind that of the rest of society as the overall standard of living rises with productivity. Without the COLA, the individual’s standard of living would fall even below what it was when he or she retired.

So what do opponents mean by “progressive” indexing?

This is just applying price indexing to only some workers. It would change the current indexation of benefits for “high” income and “middle” income individuals, leaving the current formula in place for the bottom 30% of wage earners. The highest wage earners’ benefits would be adjusted for inflation, but not for productivity growth. Middle-wage earners (those between 30% and 70%) would have their benefits only partially adjusted for productivity growth.

When former President Bush talked about his tax cuts, he defined “middle income” as $200,000, which is actually in the top 2% of income. But when he talked about Social Security he defined middle income as $36,500 in 2005, and high income as $58,400. Under “progressive indexing,” the retirement benefits of all workers would ultimately be reduced to match those of low-income workers regardless of how much they contributed to the system. This would result in a massive increase in poverty among the elderly, undermine political support for the system, and destroy Social Security. This does not fit the definition of a “progressive” policy.

What impact would the conversion to private accounts have on the national debt?

The government would have to borrow an additional $4 trillion over the next 20 years to make up the money that would be drained out of the system by private accounts. Former President Bush and Congress racked up an average $793 billion deficit each year Bush was in office. Social Security privatization would raise the size of the government’s deficit by another $300 billion per year for the next 20 years. This does not seem to bother Republicans, as long as they are in power. In fact, by the time the second Bush left office, the national debt had grown to $12.1 trillion. Over half of that amount had been created by Bush’s tax cuts for the very wealthy. Another 30% of the national debt had been created by the tax cuts for the wealthy under Presidents Reagan and George H.W. Bush. Fully 81% of the national debt was created by just these three Republican Presidents.

How would the rest of the U.S. economy be affected if the private accounts replaced the current system?

Put simply, moving to a system of private accounts would not only put retirement income at risk—it would likely put the entire economy at risk.

The current Social Security system generates powerful, economy-stimulating multiplier effects. This was part of its original intent. In the early 1930s, the vast majority of the elderly were poor. While they were working, they could not afford to both save for retirement and put food on the table, and most had no employer pension. When Social Security began, elders spent every penny of that income. In turn, each dollar they spent was spent again by the people and businesses from whom they had bought things. In much the same way, every dollar that goes out in pensions today creates about 2.5 times as much total income. If the move to private accounts reduces elders’ spending levels, as almost all analysts predict, that reduction in spending will have an even larger impact on slowing economic growth.

The current Social Security system also reduces the income disparity between the rich and the poor. Private accounts would increase inequality—and increased inequality hinders economic growth. For example, a 1994 World Bank study of 25 countries demonstrated that as income inequality rises, productivity growth is reduced. Market economies can fall apart completely if the level of inequality becomes too extreme. The rapid increase in income inequality that occurred in the 1920s was one of the causes of the Great Depression. And the rapid increase in inequality under the Reagan and two Bush administrations was one of the causes of the current “Great Recession.”

Won’t having people invest in stocks strengthen the business sector?

There is a commonly accepted myth that buying stock in the stock market provides funds directly to businesses that they can use for new investment. This is completely incorrect. Only when someone buys stock that is part of an initial public offering (IPO) does the money go directly to the firm. If you were to buy a share of Microsoft stock tomorrow, the money you pay would go to the owner of that stock and not to Microsoft. If a large number of people were to suddenly enter the stock market, it would drive up the selling price of stock and create a windfall for those who currently own stock, but it would not provide a penny to the firms whose stock is traded. Economists Dean Baker and Bob Pollin did a study a decade ago during the IPO boom that illustrates this distinction. They found that for every $113 in stocks traded, less than one dollar actually went to businesses to finance real investment.

England initiated private accounts in 1984 that failed miserably. Is it likely that private accounts would fail in the United States?

The British experiment with private accounts has indeed failed to provide an adequate and stable retirement income for the majority of citizens. The United Kingdom is now trying to figure out how to switch back to a defined-benefit system of retirement insurance. The problem is that the trillions of pounds that were diverted into the stock market can’t be brought back into the defined-benefit system.

Chile’s system is one that former President Bush often mentioned to justify his push for private accounts. One of Bush’s advisors on Social Security was Jose Pinera, who designed the system in Chile for the Pinochet military dictatorship. Under that government, workers were encouraged to opt out of the system of pension insurance and into private accounts. Over the past 25 years, the return on stocks in Chile has averaged over 10%—a higher return than we can expect in the U.S. stock market over the next 25 years. Yet, even with that extremely high rate of return, the average Chilean retiree relying on private savings will receive a benefit less than half as large as someone who had remained in the old system, and those benefits, unlike those of the old system, last only 20 years. If a retiree is “unlucky” enough to live longer than that, he will simply run out of retirement income. Those in the old system not only receive a higher benefit, but the benefit lasts as long as they live and continues to provide benefits to their surviving spouse.

A recent survey shows that 90% of Chileans who opted for the private accounts wish they had remained in the old system. The only people who have benefited by the new system are the wealthiest top 2% of the population.

The United States’ Social Security system is the most efficiently run insurance program in the world, with overhead of only 0.7% of annual benefits. For every $100 paid into the system, $99.30 is paid out in benefits to retirees. In the British and Chilean systems, at retirement, workers convert their private accounts to annuities provided by private insurance companies. In the United States, overhead for annuities provided by private firms average about 20%; for every $100 paid in, $20 gets siphoned off. And almost no annuities are indexed for inflation.

There is a third important experiment with “private accounts” to consider: the United States’ own experiment with defined-contribution retirement plans. Since 1975, corporations have been phasing out their old defined-benefit pensions and replacing them with private savings accounts such as 401(k)s. In 1975, 39% of private-sector workers were covered by defined-benefit pensions, and only 6% by defined-contribution savings plans. By 1998 the share covered by real pensions had plummeted to just 18% and the percent relying on private accounts had risen to 38%.

What has this rapid reversal done to retirement income security? A 2002 study by New York University economist Edward Wolff defines retirement income insecurity as having less than half of your final working income in your first year of retirement. In 1989, less than 30% of workers aged 47 to 64 faced retirement income insecurity. Yet by 1999, after the shift to greater reliance on private accounts, even after the most rapid run-up in stock values in U.S. history, almost 43% of workers in this age group faced retirement income insecurity.

We don’t have to look to other countries to see the results of a shift to private accounts. That experiment has already been tried in the United States, and it failed.

How large is the employer’s contribution for every dollar put into the system by the wage earner? What happens to the employer’s contribution to Social Security under the private accounts proposal?

The employee pays a payroll tax of 6.2% on every dollar earned, up to an income level of $106,000. The maximum amount of tax paid annually is $6,572. The employer pays a tax that is exactly equal to that paid by the employee.

It’s difficult to answer the second part of the question precisely, since the proponents of private accounts do not provide details of their actual proposal. While the plan developed by former President Bush’s first-term Social Security advisory commission did not speak to this issue directly, in his first term he suggested that employer contributions should be reduced by the same amount as employee contributions. If that occurred, employers would see their portion of payroll taxes drop from 6.2% to 2.2% (a reduction of 64.5%). This would be a huge windfall for corporations.

Former President Bush’s top five campaign donations in 2004 were from large brokerages. For instance, Morgan Stanley gave $600,480 and was the largest contributor to the Bush campaign. Do these brokerages stand to benefit financially from the privatization of Social Security?

This industry was the biggest contributor to former President Bush in both the 2000 and 2004 campaigns. How much it stands to gain depends on how many people decide to opt for the private accounts; estimates range from $40 billion to $80 billion per year.

It’s likely that only the 16 brokerage firms that are allowed to interact with the Federal Reserve Bank would be permitted to manage private accounts. Divide $40 billion by 16 and you get $2.5 billion for each firm. A $2.5 billion annual return on a $600,000 “investment” in the Bush campaign is pretty amazing!

The reason so many Enron employees lost so much is that they forgot the first step of investing—diversify! Isn’t diversification the key?

You are correct that history shows that diversified investing provides the best opportunity for success. But it does not guarantee success.

My research, and that of others, addresses this issue directly. If the amount contributed to Social Security by a median-income worker had been put into a diversified portfolio, and if that individual were to live 20 years into retirement, and if the economic outcomes (real wage and stock market growth rates) of any 10-year period during the 20th century were applied to that portfolio, only the period of the 1990s would result in higher retirement income from the portfolio than the existing Social Security system.

If that person were to live longer than 20 years, even the decade of the 1990s would not have outperformed Social Security. The only reason that anyone is willing to look seriously at private accounts is because of the aberrant behavior of the stock market during the 1990s.

Today, most retirees relying on 401(k) plans have significantly lower retirement income than those who were able to hold on to their old defined-benefit pension plans. It is not only workers at bankrupt companies like Enron who have been hurt; Enron highlights the level of risk imposed upon all workers by private accounts. We’ve been told repeatedly that if we diversify our holdings in private accounts sufficiently, we don’t face much risk. But when the stock market goes down significantly (e.g., 45% in 2001-2002), diversification does not provide much protection.

Former Bush Social Security advisor Sylvester Scheiber, who works for the corporate benefits consulting firm the Wyatt Group, wrote an article in 1994 predicting that the financial markets are likely to lose as much as half of their value as the baby boom generation retires and starts to sell its financial assets to pay for food and rent. This is why he has been advising his corporate clients for decades to replace their real defined-benefit pension plans with 401(k) plans. It shifts the cost of a financial collapse from the corporation to the employees.

How important are the assumptions being made about economic growth and stock market returns to the privatization proposals?

The growth numbers underlying the talk of a shortfall in the trust fund are extremely pessimistic, while the stock market projections behind the privatization proposals are extremely optimistic. Privatization supporters assume that long-term GDP growth will be only 1.8%, yet they claim the return on stocks will be 7% per year. Other than the Great Depression, the slowest decade of growth in U.S. history was the 1980s, with a growth rate of 2.4%. If the economy grows at 2.4%, the Social Security trust fund never goes to zero.

But what if we use these assumptions? In 2004, the GDP was almost $12 trillion, and the value of publicly traded stock was about $40 trillion, a ratio of 3.3 to one. If, as in the past, half of the return on stocks takes the form of an increase in stock prices, in 60 years the value of the stock market will be a lopsided nine times the size of the economy. If the other half of the return came from dividends, fully one-third of GDP would need to be paid out in dividends at that time. This scenario is impossible. The assumptions don’t make sense.

Young people say they want more control over their Social Security investments. How do you explain the purpose of Social Security to today’s young workers?

The best way to explain Social Security is to say what it is. It’s an insurance system that protects your income when you retire or face disability, and provides income to your children if you die. Former President Bush wanted you to look at Social Security as an investment, but it is not. It is a form of insurance that guarantees you a constant stream of income in retirement or in case of disability, adjusted to protect against inflation, for as long as you live.

Social Security can be compared to other types of insurance such as home insurance. You insure your home because if it should burn down, you would not be able to afford to rebuild it with your personal income alone. If your house never burns down, you will pay into the insurance fund and never get a penny back. But fire insurance isn’t a “bad investment” because it isn’t an investment at all. You are purchasing security.

Unlike fire insurance, Social Security inevitably gives most of us our money back. But the fact that we get money back does not change the fact that Social Security is a form of insurance, not an investment. Only the richest of the rich can afford not to have insurance and to rely solely on their own savings and investments to fund their retirement or risk of disability.

Young people must also understand that financial investments are inherently risky. Many investments fail, and when they do, you lose all of the money you invested. Today’s 25-year-olds have only seen the stock market go up, except for two (very large) drops. But you don’t have to go back to the 1930s to see a different picture: If you put money into the stock market in 1970 and waited until 1980 to take it out, you would have lost money. There is absolutely no guarantee that stock speculators will see the high returns those who support private accounts are falsely promising.

Doug Orr is a professor of economics at Eastern Washington University. He speaks and writes regularly about Social Security.

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