Commentary

The AARP: Honest Broker or Honestly Broken?

By Andrew G. Biggs
January 28, 2003

AARP, formerly the American Association of Retired Persons, portrays itself as a voice of reason on Social Security, with less strident attacks on personal retirement accounts than other seniors’ groups. Despite AARP’s calls for bipartisan dialogue, however, its policy paper on accounts released just before the November elections delivers a plethora of erroneous objections, almost all of them technically wrong, out-of-date, or misguided.

A personal accounts system would allow workers to invest part of their payroll taxes in stock and bond mutual funds. At retirement, workers would draw on their accounts to pay retirement benefits, reducing what the traditional system must pay and bringing it toward solvency. The principle is simple, even if the details can be complex.

But the AARP study, “Ten Points Concerning Carve-Out Social Security Individual Accounts,” almost wholly ignores the details of personal accounts.

For instance, AARP claims that personal accounts would cut benefits. “Even when the income from individual accounts is added to the guaranteed benefit,” the AARP claims, “workers’ retirement income would average 20 percent below current-law levels.” If that were true, why would anyone favor personal accounts?

In fact, current law dictates that when the trust fund runs out in 2041, benefits must be cut by 25 percent. Compared to Social Security’s payable benefits, personal account proposals from the president’s reform commission increase benefits by 38 percent for an average-wage worker retiring in 2042 and 61 percent for a low-wage worker. But you wouldn’t know from AARP that, dollar for dollar, personal account proposals offer more bang-for-the-buck than the traditional program.

You also wouldn’t know about personal accounts’ low administrative costs, as AARP cites obsolete cost estimates five times higher than those from Social Security’s independent actuaries. Nor that personal account plans would increase Social Security’s progressivity and improve the safety net for low-wage workers and women, lifting thousands out of poverty. The AARP study assumes otherwise, without reference to the Social Security Administration’s authoritative non-partisan analysis.

The AARP also attacks personal accounts for their “transition costs,” but ignores their substantial “transition benefits.” Accounts do cost more in the short-term because we must continue paying benefits to current retirees. But when account-holders retire, Social Security’s finances improve.

The AARP favors supplemental personal accounts on top of Social Security. These, however, have the same transition costs as Social Security accounts but none of the transition benefits. As the non-partisan Social Security Advisory Board points out, because add-on accounts would supplement rather than replace traditional benefits, they have “No direct effect on the Trust Fund deficit.” If supplemental accounts consume funds that would otherwise be used for reform, Social Security would be worse off than before.

The AARP study also says “accounts would increase the risk faced by participants” by making their benefits “depend on the performance of the stock market.” Does AARP believe that an insolvent Social Security system involves no risk? Besides, accounts would be voluntary, and no worker would be forced to invest even a penny in the stock market. Even workers investing in government bonds could increase their benefits. But again, you’d never know that from the AARP paper.

AARP also claims that only Social Security can provide inflation-protected retirement benefits. Yet the federal Thrift Savings Plan - upon which personal accounts are modeled - already offers inflation-adjusted annuities, as do TIAA-CREF and private providers. Moreover, a recent study by three respected economists concludes that, “The widespread availability of real annuities in the U.K.,” which has had personal accounts since 1986, “dispels the argument that private insurance markets could not, or would not, provide real annuities to retirees.”

AARP’s leadership may oppose personal accounts, but its younger members likely support them. (A post-election Gallup poll showed 53 percent support among Americans aged 50-64, with 43 percent opposed.) Making matters worse, AARP supports letting the government invest the Social Security trust fund in the stock market, a plan that both Alan Greenspan and Al Gore thought risked political control over the economy. A July 2002 Zogby International poll found that likely voters over 50 favor personal accounts over government investment by a nearly two-to-one margin. The AARP’s leadership is as out of step with its next generation of members as its policy paper is with the facts.

AARP has a position of trust among America’s seniors but does its members a disservice by spreading disinformation about reform options they may want to consider. AARP’s recent Social Security publications are at odds with its membership, with the findings of every recent bipartisan commission, and with the nonpartisan analysis of Social Security’s actuaries. That doesn’t bode well for the AARP’s chances to play the honest broker on Social Security.

Andrew G. Biggs is a Social Security analyst at the Cato Institute.