Elizabeth Warren: Why We Must Expand Social Security

Alternet is carrying the article Elizabeth Warren: It’s the Right of Every American to Retire with Dignity — Why We Must Expand Social Security.  The dateline is today and the words are from Elizabeth Warren, but there is nothing new.  It is still a good argument for why we need to expand Social Security benefits.

For a generation now, working families have been squeezed by stagnant wages and rising costs for housing, health care, and college. Even as families have cut back on expenses for things like food, clothing, furniture, and appliances, it hasn’t always been enough; many have been forced to take on more and more debt just to pay for necessities.

One major consequence of these increasing pressures on working people is that the dream of a secure retirement is slowly slipping away. Families haven’t been able to save as much as they used to, and only 18 percent of private-sector workers have defined benefit pensions today compared with 35 percent two decades ago. Forty-four million workers have no workplace retirement savings plan.

I do have a  bone to pick with an idea that Elizabeth Warren keeps repeating.

Social Security works; no one runs out of benefits and the guaranteed payments don’t rise and fall with the stock market.

The Social Security works part is correct.  The part after the semicolon has a grain of truth if you really understand investing, but its implications are totally misleading if you don’t. I left comments on the article.

If the system were run like a really well managed retirement system, the investments would be diversified beyond special Treasury bonds that pay 5% interest. I am definitely not proposing privatizing Social Security, where everyone has to invest in stocks at retail. The successful national, state, and private pension funds don’t have their members do their own investing. In the history of corporate pension funds that were successful over the long-haul, none of them had the members do their own investing.

The individuals who do know how to save and invest for retirement do use the stock market as one of their investment tools, and they also protect themselves from the ups and downs of the stock market. In retirement, you depend on regular dividends from reliable companies. The stock market as a whole and over time historically has returned 10% growth on average, only some of which comes from dividends. The rest comes from capital gains. So you aren’t going to take 10% of your investments out every year in retirement. Under most circumstances, history has shown that it is safe to take out 5% a year and your nest-egg will grow with inflation until you die. This way the 5% a year you take out will also grow with inflation.  You also need a lifestyle with enough flexibility in it so that you can adjust during really major financial disasters if things get so bad that you can’t even get your 5% out without reducing your capital.  I retired in 2006, and we had a severe market  crash only 3 years later.  That is one of the worst things that can happen to you in retirement. I recovered from that quite nicely, thank you very much.

So Elizabeth Warren is not telling the complete truth when she implies that investing in stocks is too risky, without clarifying the rightful place for stock investing in a total retirement strategy. She wrote a book with her financial adviser daughter on how to manage the family budget. Surely she learned enough from her daughter if she hadn’t already known it herself, that pretending that the stock market is too risky for a pension system is to oversell the dangers of an idea that can be used wisely, if you know how.

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